U.S. Media & Cable

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

10 January 2017 Americas/United States

Equity Research Entertainment

U.S. Media & Cable Research Analysts

Omar Sheikh

212 325 6818

[email protected]

Lawrence Dann-Fenwick

212 538 8442

[email protected]

Boyao Sun

212 325 3494

[email protected]

SECTOR REVIEW

Themes for 2017

■ Long live the bundle, remain Overweight: We remain Overweight US

Media going into 2017. The investor perception that the industry is

structurally challenged will reverse further this year, in our view, allowing

multiples to recover. Critical to this bullish thesis is how long disruption from

SVOD aggregators will take to impact incumbents – we believe we may

only be half way through a 15-year transition to on-demand and, with

incumbents now responding aggressively, fears that the traditional video

bundle will unravel will continue to be disappointed.

■ Six themes for 2017: We highlight six themes that will drive stock price

performance of US Media/Cable stocks in 2017:

(1) "Virtual" MVPDs including from DirecTV and Hulu, attract strong

consumer demand, slowing down the pace of video bundle subscriber

declines, and disrupting the SVOD disruptors.

(2) TV advertising remains robust, with share of media spend sustained,

and targeted advertising products gaining traction.

(3) Pending M&A deals are approved, further emphasising to the rest of

the industry the benefits of scale and of vertical integration.

(4) Ad agency transparency issues continue, with the impact of last year's

ANA report on media buying rebates creating a headwind for fee growth.

(5) US tax rates fall, dollar strength continues, providing a significant

below the line tailwind to an industry weighted to domestic earnings.

(6) Net neutrality is scrapped, which would boost long term pricing power

for cable and telco broadband providers.

■ FOXA remains our top pick: We reiterate our preference for FOXA (OP),

given (i) the Sky transaction will remove M&A risk for the next 2-3 years; (ii)

our confidence that earnings risk now looks modest; and (iii) our bullish

view on the future value of Hulu. We upgrade our TP to $37.

■ Running the slide-rule over DIS/NFLX: We also analyse the merits of

DIS (OP, $125) acquiring NFLX (N, $130) and conclude that the

transaction would be hard to justify given the material dilution to EPS/FCF,

and that improving industry trends reduce the strategic pressure for

considering the acquisition of downstream distribution assets.

■ Cut DISCA to UP: We cut our rating on DISCA to UP (from N), based on a

more cautious view on US advertising revenues in 2017, given ratings are

likely to remain weak in 2017 as news networks continue to take share. We

remain cautious on the potential payback from the step-up in premium

sports rights investment, and see the premium valuation as unjustified.

10 January 2017

U.S. Media & Cable 2

Figure 1: CS U.S. Media & Entertainment/Cable & Satellite coverage

Note: Market data as of 1/6/2017. IPG & OMC valuations are based on Average Net Debt of last 4 reported quarters. Estimates are calendarized and adjusted for differing fiscal year. CBS estimates based on consensus.

Source: Company data, Credit Suisse estimates

Figure 2: Media/Cable: EV/IC vs CFROI® Figure 3: Media/Cable: Economic Profit vs EV

Source: Credit Suisse HOLT®, Company data, Credit Suisse estimates

Note: CFROI is calculated excluding goodwill and intangibles

Source: Credit Suisse HOLT, Company data, Credit Suisse estimates

Note: CFROI is calculated excluding goodwill and intangibles

Figure 4: Media vs S&P 500 composite Figure 5: US Media vs S&P 500 composite 2016

Source: Thomson Reuters Source: Thomson Reuters

Market Target Market Net Enterprise Net debt /

Rating Price Price Cap Debt Value 2017E 2018E 2017E 2018E 2017E 2018E 2017E EBITDA

Media & Entertainment

The Walt Disney Company O $109 $125 $175,276 $15,560 $194,894 3.3x 3.1x 11.2x 10.4x 17.6x 15.6x 0.9x

Time Warner Inc. O $95 $108 $75,093 $22,163 $97,256 3.1x 3.0x 11.0x 10.1x 16.0x 14.2x 2.5x

21st Century Fox O $30 $37 $54,769 $14,807 $71,377 2.4x 2.2x 9.6x 8.9x 14.3x 11.9x 2.0x

Viacom O $38 $42 $15,090 $11,534 $26,677 2.0x 1.9x 7.8x 7.3x 8.6x 7.8x 3.4x

CBS R $64 N/A $28,200 $8,778 $36,978 2.5x 2.4x 10.6x 9.8x 14.5x 12.3x 2.5x

Discovery Communications U $27 $23 $17,158 $7,772 $25,177 3.6x 3.3x 10.3x 9.6x 12.8x 11.2x 3.2x

Interpublic Group O $24 $27 $9,496 $832 $10,606 1.3x 1.3x 9.1x 8.6x 16.3x 14.7x 0.7x

Omnicom N $86 $83 $20,379 $2,915 $24,010 1.5x 1.4x 10.0x 9.5x 16.6x 15.2x 1.2x

Manchester United O $16 $18 $2,596 £338 £2,452 4.2x 3.9x 12.3x 10.6x NM NM 1.7x

2.7x 2.5x 10.2x 9.4x 14.6x 12.9x 2.0x

Cable & Satellite

Comcast O $70 $73 $172,922 $57,621 $234,211 2.9x 2.7x 8.5x 8.0x 18.4x 16.0x 2.1x

DISH Network N $61 $52 $28,687 $11,510 $40,514 2.7x 2.7x 13.4x 13.9x 23.2x 24.6x 3.8x

2.8x 2.7x 11.0x 10.9x 20.8x 20.3x 3.0x

Movie Exhibitors

National CineMedia O $15 $21 $961 $885 $2,092 4.0x 3.9x 7.5x 7.6x 21.2x 21.3x 3.2x

IMAX Corp O $32 $42 $2,208 ($190) $2,077 4.9x 4.4x 13.2x 11.2x 24.0x 20.0x -1.2x

AMC Entertainment Holdings O $34 $33 $3,427 $1,903 $5,329 1.6x 1.5x 8.6x 8.0x 22.4x 19.3x 3.1x

Cinemark Holdings, Inc N $40 $37 $4,720 $1,492 $6,225 2.0x 1.9x 8.1x 7.6x 18.1x 16.5x 1.9x

Regal Entertainment Group N $22 $22 $3,429 $2,159 $5,588 1.7x 1.6x 8.5x 8.2x 19.3x 17.8x 3.3x

2.8x 2.7x 9.2x 8.5x 21.0x 19.0x 2.1x

US Media, Cable & Satellite 2.7x 2.6x 10.0x 9.3x 17.6x 15.9x 2.1x

EV/Sales EV/EBITDA P/E

IPG

OMC

PUBPWPP

Dentsu

HAVA

DISTWX

FOXAVIAB

CBS DISCA

CMCSADISH

R² = 0.874

0x

2x

4x

6x

8x

10x

12x

14x

16x

18x

20x

0% 10% 20% 30% 40% 50% 60%

Ent

erpr

ise

Val

ue /

Inve

sted

cap

ital

Forecast returns on capital (CFROI)

IPGOMC

PUBP

WPP

Dentsu

HAVA

DIS

TWX

FOXA

VIABCBS

DISCA

CMCSA

DISH

R² = 0.7867

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000

EV

($m

)

Economic Profit ($m)

0

50

100

150

200

250

300

1/5/

2007

5/5/

2007

9/5/

2007

1/5/

2008

5/5/

2008

9/5/

2008

1/5/

2009

5/5/

2009

9/5/

2009

1/5/

2010

5/5/

2010

9/5/

2010

1/5/

2011

5/5/

2011

9/5/

2011

1/5/

2012

5/5/

2012

9/5/

2012

1/5/

2013

5/5/

2013

9/5/

2013

1/5/

2014

5/5/

2014

9/5/

2014

1/5/

2015

5/5/

2015

9/5/

2015

1/5/

2016

5/5/

2016

9/5/

2016

1/5/

2017

Global Ad Agencies S&P 500 DJ US Media

US Media

Global ad agencies

S&P 500

-17%

-16%

-15%

-14%

-12%

-6%

-1%

1%

1%

2%

3%

3%

8%

9%

10%

10%

10%

12%

14%

15%

22%

29%

35%

40%

42%

49%

-40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60%

LIONS GATE ENTM.'A'

TEGNA

VIACOM 'B'

NEWS 'A'

IMAX (NYS)

NATIONAL CINEMEDIA

WALT DISNEY

INTERPUBLIC GROUP

DISH NETWORK 'A'

ALPHABET 'A'

DISCOVERY COMMS.'A'

TWENTY-FIRST CENTURY FOX CL.A

NETFLIX

REGAL ENTM.GP. 'A'

S&P 500 COMPOSITE - PRICE INDEX

FACEBOOK CLASS A

APPLE

OMNICOM GROUP

S&P500 MEDIA - PRICE INDEX

CINEMARK HOLDINGS

COMCAST 'A'

SCRIPPS NETWORKS INTACT. 'A'

CBS 'B'

AMC ENTERTAINMENT HDG. CL.A

CHARTER COMMS.CL.A

TIME WARNER

2016

10 January 2017


Themes for 2017

We remain bullish on US Media in 2017, and retain our Overweight view. We highlight 6 themes that will drive the performance of the group this year in Figure 6 below, and elaborate on our thinking in the following paragraphs.

Figure 6: Themes for 2017

Source: Credit Suisse estimates

Theme #1: "Virtual" MVPDs launch

The most important theme in 2017 will be the introduction of "virtual" MVPD services into

the US market. The key feature of these services – which include Sling, PlayStation Vue,

DirecTV NOW and soon a new service from Hulu – is they sell content in the form of live

ad-funded networks, licensed on a variable per subscriber basis, and offer the service with

varying degrees of on-demand and multi-device functionality. By contrast, SVOD services

from Netflix, Amazon and others (see Figure 7) bundle individual series, licensed on a

fixed fee basis with no advertising and with full on-demand/multi-device functionality.

We see the emergence of this new category of content bundle as critical to the long term

health of the traditional video ecosystem. Strategically, they represent the first of what we

would characterize as a two part competitive response to SVOD services – they aim to

match the on-demand/multi-device functionality offered by Netflix, Amazon and others

while preserving the variable per subscriber affiliate revenue model, and continuing to sell

advertising around their content.

The second part of the competitive response is also important, i.e., a reduction in the

volume of shows licensed by studios to SVOD services. As we have highlighted in

previous research, by slowly "turning off the tap" of content sold to Netflix, Amazon and

others, the speed with which SVOD services can become substitutes for bundles of linear

networks ("fat" or "skinny") can be slowed down.

The impact of "virtual" MVPDs on the rate of decline in the traditional ecosystem is already

meaningful. As we highlight in Figure 9, by including just one service (Sling) to the total

number of subscribers to a network bundles, the annual rate of decline nearly halves from

-1.5% pa to just -0.8% pa. If DirecTV NOW and Hulu gain traction, the rate of decline in

the total number of subscribers to network bundles should improve further, in our view.

Theme Detail

Positive Negative

1) "Virtual" MVPDs launch Virtual MVPDs including Hulu will launch and direct to consumer

offerings will gain scale, further disrupting the disruptors

Included networks, studios Traditional MVPDs, excluded

networks, NFLX, AMZN

2) TV advertising remain robust TV advertising will decline y/y but its share of media spend will

continue to be robust, and targeted advertising products will gain

traction, allaying fears of a "tipping point" coming any time soon

Networks, ad agencies GOOGL, FB (relative)

3) Pending M&A deals are approved The T/TWX and FOXA/SKYB transactions will close, further

emphasising the benefits of scale and vertical integration in the

domestic media industry.

Sellers, media industry -

4) Ad agency transparency issues continue Ad agencies will face fallout from transparency issues

(rebates/"rigging" of TV production contracts), possibly impacting

their fee growth

Agency clients, independent

production/post-production

companies

OMC, IPG

5) US tax rates fall, dollar strength continues Tax rates will fall, boosting after-tax cash flow; and the US dollar

will stay strong, making overseas M&A increasingly attractive.

Investments in China and India will continue to pay back, but

Trump-era protectionism is a key risk

Domestic earners, overseas buyers Overseas earners, domestic buyers

6) Net neutrality scrapped Net neutrality legislation will be scrapped, boosting cable's

broadband pricing power

Cable industry NFLX, AMZN

Impact

10 January 2017


Figure 7: "Virtual" MVPD and SVOD services


Figure 8: The universe of pay TV homes stopped

growing in 2009, and is now shrinking

Figure 9: Subscriber declines in 2016 stabilize after

including growth at Sling TV

Source: Company data, SNL Kagan, Credit Suisse estimates Source: Company data, SNL Kagan, Credit Suisse estimates

OTT

Services Netflix Amazon Showtime HBO Now Seeso YouTube Red

CBS All

Access ESPN Hulu (SVOD) Hulu (vMVPD)

PlayStation

Vue Sling TV DirecTV Now Apple

Parent Co. Netflix Amazon CBS Time Warner NBC Google CBS Disney FOXA, DIS,

CMCSA, TWX

FOXA, DIS,

CMCSA, TWX

Sony DISH Network AT&T Apple

Advertising No No No No No No Yes Yes Yes Yes Yes Yes Yes Yes

Price (paid

subscription)

$9.99/month $8.25/month

or free with

Prime

$10.99/month $14.99/month $3.99/month $9.99/month $5.99/month,

$9.99/month

for ad-free

TBA $7.99/month,

$11.99/month

for ad-free

$39.99/month $39.99-

$74.99/month

$20/month

(Orange),

$25/month

(Blue)

$40/month

(combined)

$35/month

(introductory

price), then

$70/month for

100 channel

package.

$30-

$40/month

Restrictions 4 users 2 users 5 users 3 users 1 user 1 user 1 user TBA 1 user 2 users 1 user 1 user on

Orange,

multiple on

Blue

2 users TBA

Available

content

Originals,

popular tv

shows and

movies

Originals,

popular tv

shows and

movies

All Showtime

Content

All HBO

content, large

film library

NBC: Comedy

shows, some

original content

Original

content from

top YouTube

creators, all

major music

labels (ad-free)

CBS, some

exclusive

original content

(Star Trek)

MLB, NHL,

College sports,

etc.

No NBA or

NFL games

Originals,

popular tv

shows and

movies

Disney, Fox,

CBS, NBC,

Turner

Networks

Popular

channels

available from

all net works,

excluding

Viacom

Channels from

all major

networks

except CBS.

Broadcast

networks only

available in

select

markets.

Channels from

all major

networks

except CBS.

Broadcast

networks only

in select

markets. Add

HBO for $5

ABC, CBS,

Fox, HBO

Availability 190 Countries,

excluding

China

U.S., U.K.,

Jap., Germ.,

Austria

U.S. U.S.,

Scandinavia,

Spain

U.S. U.S., Australia,

New Zealand

U.S. 2017, U.S.

Only

U.S. and

Japan

Early 2017,

U.S. only

U.S. U.S. U.S. TBA

Platform iOS, Android,

Roku, FireTV,

Apple TV,

Chromecast,

Set Top

Boxes,

Desktop,

game consoles

iOS, Android,

Roku, FireTV,

Apple TV,

Chromecast,

Set Top

Boxes,

Desktop,

game consoles

iOS, Android,

Roku, FireTV,

Apple TV,

Chromecast,

Set Top

Boxes,

Desktop,

game consoles

iOS, Android,

Roku, FireTV,

Apple TV,

Chromecast,

Set Top

Boxes,

Desktop,

game consoles

iOS, Android,

Roku, FireTV,

Chromecast,

Desktop,

game consoles

iOS, Android,

Roku, FireTV,

Chromecast,

Desktop,

game consoles

iOS, Android,

Roku, FireTV,

Apple TV,

Chromecast,

Set Top

Boxes,

Desktop,

game consoles

TBA iOS, Android,

Roku, FireTV,

Apple TV,

Chromecast,

Set Top

Boxes,

Desktop,

game consoles

TBA PlayStation

3 & 4

iOS, Android,

Roku, FireTV,

Chromecast,

Set Top

Boxes,

Desktop,

game consoles

iOS, Android,

Roku, FireTV,

Chromecast,

Set Top

Boxes,

Desktop,

game consoles

iOS Devices,

Set Top

Boxes

Users 83m N/A 1m+ 1m+ N/A 1.5m+ 1.2m+ N/A 12m+ (US) N/A 100k+ 1.1mn (CSe) N/A N/A

Amount of

Content

"Movies:

~5,300;

TV series:

~1,100,

"Films:

17,396;

TV seasons:

1,864"

All Showtime

Content

All HBO

content

Hundreds of

episodes and

back seasons

Millions of

videos, 20

original series

>7,500

episodes; live

stream in

>100 markets

TBA "Films:

~5,300;

TV series:

~3,700"

Core channels

and networks,

deep VOD

library

Most channels

and networks

except Viacom

Most channels

and networks

70-120

Channels

TBA

SVOD vMVPD

0

20,000

40,000

60,000

80,000

100,000

120,000

2001

2002

Q1

'03

Q2

'03

Q3

'03

Q4

'03

2003

Q1

'04

Q2

'04

Q3

'04

Q4

'04

Q1

'05

Q2

'05

Q3

'05

Q4

'05

Q1

'06

Q2

'06

Q3

'06

Q4

'06

Q1

'07

Q2

'07

Q3

'07

Q4

'07

Q1

'08

Q2

'08

Q3

'08

Q4

'08

Q1

'09

Q2

'09

Q3

'09

Q4

'09

Q1

'10

Q2

'10

Q3

'10

Q4

'10

Q1

'11

Q2

'11

Q3

'11

Q4

'11

Q1

'12

Q2

'12

Q3

'12

Q4

'12

Q1

'13

Q2

'13

Q3

'13

Q4

'13

Q1

'14

Q2

'14

Q3

'14

Q4

'14

Q1

'15

Q2

'15

Q3

'15

Q4

'15

Q1

'16

Q2

'16

Q3

'16

Cable DBS Telco

(2)%

(1)%

0%

1%

2%

3%

4%

5%

6%

7%

Q4

'04

Q2

'05

Q4

'05

Q2

'06

Q4

'06

Q2

'07

Q4

'07

Q2

'08

Q4

'08

Q2

'09

Q4

'09

Q2

'10

Q4

'10

Q2

'11

Q4

'11

Q2

'12

Q4

'12

Q2

'13

Q4

'13

Q2

'14

Q4

'14

Q2

'15

Q4

'15

Q2

'16

LTM Net Additions/(Losses) as % of avg subs LTM Net Additions/(Losses) incl. Sling

Excluding Sling, industry net sub losses were running at -1.5% in Q3 2016. Including Sling, however, they were running at -0.8%

10 January 2017


Figure 10: The traditional video ecosystem is being challenged by the emergence of online video

Source: Credit Suisse Research, SNL Kagan

Figure 11: US video bundles - 2016 Figure 12: US video bundles – 2020E

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Movie Studios TV Studios Sports Leagues

Drama/Series News

Chat shows Daytime

Marquee sports Regional sportsMovies

Broadcast

Networks

Premium

sports

networks

Cable

Networks

Movie

Networks

Regional

sports

networks

Ad-

funded

MVPDs

Cable systems IPTV networksSatellite

C C C C C C C C C C C C C C C C C C C C C C C C C

Affiliate fees

$7BRetransmission fees

$4B

Affiliate fees

$38BAffiliate fees

$7B

Affiliate fees

$5B

Content licences

Content licencesContent licences

Content licences Content

Advertisers

Content

Licence fees Licence fees

Licence feesLicence fees

Licence fees

ContentContent

Content

Content ContentAdvertising

$70B

SVODEST/

PPV

Content Content

YouTube

AOL

Yahoo!

Netflix

Amazon

Hulu

Plus

Apple

HuluHBO

NOW

% of ad revenue

Licence fees

Revenue share

Traditional Video Ecosystem Online Video Ecosystem

MVPDs (98m)

Netflix (47.6m)

Hulu SVOD (12m)

Amazon Prime

PS Vue

(0.2m)

DirecTV

Now

(0.1m)

HBO Now

(1.1m)

Sling TV

(1.4m)CBS All-

Access

(1.3m)

Starz

(1.4m)

Showtime

OTT (1.3m)

MVPDs (92m)

Netflix (65m)Hulu SVOD (40m)

Hulu live streaming (10m)

Amazon Prime

Starz (5.9m)

Showtime OTT (5.8m)

HBO NOW (5.6m)

CBS All-Access (4.8m)

Sling TV (3m)

DirecTV Now

(5.5m)

PS Vue

(0.5m)

10 January 2017


The current phase of disruption and product life cycles

Many investors will have read The Innovators Dilemma by Clayton Christensen (Boston:

Harvard Business Review Press, 1997), which lays out a framework for understanding

how well-managed incumbents in various industries are disrupted by new entrants. For

those who haven't yet had a chance to read the book, we would highly recommend it – we

think the framework is useful for understanding what is taking place in the traditional video

ecosystem today, and how it may evolve over time. We apply our interpretation of

Christensen's thinking to the US video ecosystem in the charts below.

We would emphasise that the Christensen framework is not perfect for analysing the US

video ecosystem. The framework assumes that all products in an industry – from disk

drives to mechanical excavators – are exact substitutes. We would argue this is not the

case for bundles of content (networks or cable packages), because they can differ

materially in their value to consumers, even if their cost of production is the same. A cable

package which includes, for example, HBO can have a higher consumer value than one

which excludes it; or a network which includes, for example, Homeland can have a higher

consumer value than one that does not. It is impossible for a distributor to replicate HBO,

or for a network to replicate Homeland perfectly, given the ideas underlying the

programming are proprietary and essentially unique.

That said, Christensen's work offers a number of valuable insights into current

developments in the traditional video ecosystem. We would summarise them as follows:

■ As we show in Figure 13, the basis of competition in the industry has changed over

time. Providers of video services have evolved from competing on the basis on the

number of networks in the bundle (cable, DBS 1980-1995), to competing on the basis

of the functionality provided (DVRs, HD 1995-2010). We argue that the supply of

networks and DVR/HD functionality surpassed the requirements of most consumers by

around 2010, allowing SVOD services including Netflix and Amazon to change the

basis of competition and gain traction in the market. The unique features of these

services are the convenience of providing all their content on-demand as well as

providing it on multiple devices inside and outside the home – we would argue these

features have now become of central importance to consumers, and are the new bases

of competition between providers of content bundles.

Figure 13: Innovation from SVOD services has shifted the basis of competition from the number of

networks or availability of DVR/HD to the convenience of on-demand

Source: Credit Suisse Research, adapted from The Innovator's Dilemma, Clayton Christensen (Boston: Harvard Business Review Press, 1997)

■ As we show in Figure 14, the "performance" of content bundles offered by SVOD

aggregators like Netflix and Amazon are improving at a rapid pace. In this context,

"performance" refers to the extent to which the product (i.e. the bundle of content)

satisfies the consumer. By providing a fully on-demand service available seamlessly on

TV's, laptops, tablets and smartphones, SVOD aggregators have attracted a large

number of paying subscribers – this provides them with cashflow to fund investment in

Access

Access to TV

Volume

Number of Networks

Functionality

DVR/HD

Convenience

On-Demand

Price?

Basis of Competition

Incumbents

Innovators

Innovation Barriers

Time Period

Duration

Radio Broadcasters Cable, DBS Cable, DBS, Telcos

Broadcasters Cable, DBS Telcos Netflix, Amazon

FCC Licenses Content, Capital Technology, Content Content, Technology

1941-1980 1980-1995 1995-2010 2010-2025?

39 years 15 years 15 years 15 years?

2025-?

10 January 2017


content, which in turn makes them more attractive to consumers. The implication of this

dynamic is that, if left unchecked, SVOD aggregators could grow to satisfy the needs of

an increasingly large proportion of consumers.

■ "Virtual" MVPDs, including Sling, Sony's Playstation Vue and DirecTV NOW go a long

way towards competing with the convenience of SVOD platforms. However, we would

argue the forthcoming live streaming service from Hulu is likely to surpass the

convenience of existing vMVPDs by adding on-demand functionality, including library

content, current shows and a cloud DVR. We believe the combination of a deep on-

demand offering with a comprehensive bundle of live linear networks will be

compelling, and is likely to be replicated by others in the market. We show the

"performance" trajectory of vMVPDs, led by Hulu, in Figure 15 below. This highlights

that as these services improve over time, they will satisfy the requirements of an

increasing proportion of consumers – in other words, to the extent that traditional

distributors of content bundles (cable, DBS and telcos) do not seek to compete on

convenience, they will lose share to vMVPDs.

■ Also in Figure 15, we show the impact of another important aspect of the traditional

video industry's strategy. This involves slowing down the pace at which content owners

licence their content to SVOD aggregators, which remains a significant proportion of

the total volume of content they offer – this strategy should therefore reduce the

"performance" of SVOD services over time. This analysis suggests that the

combination of a more restrictive content licensing strategy and the launch of vMVPDs

should depress the strategic challenge from the SVOD services.

■ We would highlight, however, that SVOD services can themselves respond to the

challenge from vMVPDs. As we show in Figure 16, if they accelerate their investment

in original content, they can mitigate the impact of losing access to licenced content. To

a large extent, Netflix in particular is already pursuing this strategy with a large slate of

original drama and movies. In addition to these genres, we would argue the challenge

SVOD aggregators face from vMVPDs could result in heightened appetite on their part

for control over sports content for the first time – this is a key element of the

"performance" demanded by a large number of consumers, and would allow SVOD

services to leapfrog the consumer value of vMVPDs. We note that Amazon has set up

a sports business in the last twelve months, and would regard any move by them, or

other SVOD aggregators, to acquire sports rights as potentially negative for the

industry overall.

10 January 2017


Figure 14: If left unchecked, SVOD services are improving their "performance"

at a pace which will increase their disruptive threat to the traditional ecosystem

Note: "Performance" measures consumer satisfaction with the content bundle. The basis of competition changes over time (see previous chart)


Figure 15: The "virtual" MVPD strategy disrupts the disruptors, and the content

licensing strategy can further dampen the threat from SVOD



Performance

Time20172007 2027

Performance required at top end of market

Performance required at bottom end of market

SVOD – media companies continue to licence shows/series

Performance

Time20172007 2027



SVOD – media companies reduce the volume of content licenced


“Virtual” MVPDs

10 January 2017


Figure 16: SVOD aggregators can respond themselves by accelerating their

acquisition of exclusive content, possibly including sports rights



Theme #2: TV advertising remains robust

The second most important theme for US Media/Cable in 2017 will be a likelihood of a

robust TV advertising market, with investors currently expecting US TV advertising growth

to decline modestly in 2017. Our latest survey of CMOs and marketing executives is

constructive on this front, and also supportive of our view that that the long-expected

structural shift out of TV advertising into online media is some way off.

Our long term view – a recap

The vulnerability of TV advertising to cannibalization by online media has been a key

industry debate for the last two decades. As we highlight in the charts below, in fact TV

advertising revenues in the US have not been impacted by growth in online advertising,

with TV's share of media spend remaining in the 34%-38% range throughout the 1995-

2015 period, despite online advertising's share of media spend rising from zero to nearly

30%. Online media has historically taken share from print (newspapers and magazine)

advertising, with print share of media spending more than halving from 49% in 1995 to

20% in 2015.

We argue that going forward TV advertising is unlikely to be cannibalized by online media

because TV advertising tends to be dominated by brand-building campaigns, which is

most effective around video content, which in turn is still difficult to find at scale online (see

chart below). We believe that in fact the large pool of below-the-line marketing dollars and

investment in sales promotions (roughly a combined $220bn of annual spend in the US)

are much more vulnerable to online cannibalization – both are closer substitutes to paid

search and social media campaigns, in our view.

Performance

Time20172007 2027




SVOD – disruptors accelerate acquisition of exclusive rights e.g. original dramas, or perhaps sports

“Virtual” MVPDs

10 January 2017


Figure 17: Even if we assume Facebook daily video

views doubled to 16bn in 2016, linear TV delivers

>100x that number

Figure 18: …or >99% of the combined volume on

the two platforms

Note: Facebook reported 8bn video views in 2015, based on a 3-second view. By contrast, linear TV delivers 281 minutes per day of viewing, or 5,620 3-second views per day for 311.6m individuals aged 2+. 5,620 x 311.6m = 1,751 bn

Source: Company data, Nielsen, Credit Suisse estimates

Note: Facebook reported 8bn video views in 2016, based on a 3-second view. By contrast, linear TV delivers 281 minutes per day of viewing, or 5,620 3-second views per day for 311.6m individuals aged 2+. 5,620 x 311.6m = 1,751 bn

Source: Company data, Nielsen, Credit Suisse estimates

Figure 19: US marketing spending mix 2016E Figure 20: US marketing spending mix 2016E

Source: ZenithOptimedia, Credit Suisse estimates Source: ZenithOptimedia, Credit Suisse estimates

CMO survey feedback

To shed light on these structural issues, and to get a snapshot of current spending

intentions, we conducted a proprietary global survey of marketing professionals from 85

companies in every large industry category in North America, Latin America, Europe and

Asia. A summary of the main conclusions is shown below, together with summary charts.

The full chart pack is included in our Appendix.

■ Aggregate US marketing spending is expected to grow 4.1% in 2017, versus 3.8%

in 2016. Aggregate US advertising spending is also expected to grow 4.1% in

2017 (vs 4.1% in 2016). We summarize the spending intentions of the respondents to

our survey in Figure 21 and Figure 22. These are healthy growth expectations, and

suggest appetite by advertisers to invest in marketing/advertising is robust.

16 bn

1,751 bn

0 bn

200 bn

400 bn

600 bn

800 bn

1,000 bn

1,200 bn

1,400 bn

1,600 bn

1,800 bn

2,000 bn

3-second views

Facebook Views Linear TV Views

0.9%

99.1%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Proportion of 3-second views

Facebook Linear TV

Marketing Spend

$407bn

100%

Advertising Spend

$183bn

(45%)

Promotional Spend

$224bn

(55%)

Sales Promotions

$75bn

(33%)

Below-The-Line Advertising Spend

$150bn

(66%)

Total media spend45%

Direct mail12%

Telemarketing14%

Sales promotion18%

Public relations1%

Event sponsorship8%

Directories2%

10 January 2017


Figure 21: Total US marketing budgets expected to

grow by an aggregate 4.1% in 2017 (3.8% in '16)

Figure 22: Total US advertising budgets expected to

grow by an aggregate 4.1% in 2017 (4.1% in '16)

Question: "Looking at your total marketing budget in 2017 vs 2016, by approximately how much do you expect it to grow/decline?"

Note: Responses not weighted for size of respondents' advertising or marketing budget

Source: Credit Suisse proprietary survey

Question: "Looking at your advertising budget in 2017 vs 2016, by approximately how much do you expect it to grow/decline?"



■ Advertising/promotional mix expected to shift slightly back towards advertising

in 2017, to 49%/51% from 47%/53% in 2016. This is a constructive trend for media

owners, and suggests more marketing dollars will be allocated to media spend overall

in 2017 vs 2016 – we would highlight the 2 percentage point shift equates to ~$8bn in

additional spending on all media.

Figure 23: Advertising expected to account for 49%

of total marketing dollars in 2017… Figure 24: …up slightly from 47% expected for 2016

Question: "In 2017, what do you expect to be the approximate mix in your marketing budget between advertising (i.e. media spend) and promotion/below the line?"






■ Advertising/promotional mix expected to favor advertising over the next two

years. The last survey showed a 2% net balance of respondents expected to shift

marketing budgets toward promotions. This survey shows an 8% net balance expects

to shift marketing budgets towards advertising.

0%

6%5%

21%

16%

38%

14%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Decline by morethan 10%

Decline by 5%-10%

Decline by lessthan 5%

Stay the same Grow by lessthan 5%

Grow by 5%-10%

Grow by morethan 10%

0%

3%

10%

21%

17%

32%

17%

0%

5%

10%

15%

20%

25%

30%

35%


Decline by 5%-10%



Grow by 5%-10%


Advertising49%

Promotion/Below the line51%

Advertising47%


10 January 2017


Figure 25: A net balance of 8% of respondents

expect to shift towards advertising…

Figure 26: ...vs a net balance of 2% expecting to

shift towards promotions in our last survey

Question: "Directionally over the next two years, how do you expect your marketing mix to change between "advertising" (i.e. media spend) and "promotion/below the line?"



Question: "Directionally over the next two years, how do you expect your marketing mix to change between "advertising" (i.e. media spend) and "promotion/below the line?"



■ More respondents expect to reduce allocation of advertising budgets to linear TV

over the next two years. As we highlight in the charts below, a net balance of 17% of

our respondents in the US expect to reduce the proportion of their advertising spending

allocated to linear TV over the next two years. This is up from the 7% net balance in

our last survey. This data refers to the number of advertisers, not dollar amounts of

spending, and is unweighted for the size of the respondent. Directionally it therefore

tells us that more advertisers are planning to reduce spending on TV but it does not

give any insight into the impact on overall dollars spent. We would interpret this data as

providing evidence that a large, and increasing, number of advertisers are looking to

reduce spending on traditional media, but that this headwind remains considerably

more pronounced in print and cinema/outdoor than in TV and radio.

Figure 27: A net balance of 17% of our respondents

expect to reduce spending on US linear TV…. Figure 28: …vs 7% in our last survey

Question: "Directionally over the next two years, how would you expect the mix of your advertising budget to change?"






■ More advertisers cite the ability to target as a driver of adspend. As we highlight in

the charts below, 71% of the respondents in our survey cited the ability to target

customers as a driver of the shift in their advertising spending over the next two years.

This is up slightly from the 70% recorded in our last survey. The main implication is that

efforts by TV networks to increase the amount of targeted inventory they offer are likely

to be met with strong demand from advertisers, which suggests pricing of this inventory

is likely to remain robust. We would also highlight that "virtual" MVPDs will expand the

8%

24%

44%

19%

5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Shift towardsadvertising significantly

Shift towardsadvertising slightly

Stay the same Shift towards promotionslightly

Shift towards promotionsignificantly

14%16%

38%

25%

7%

0%

5%

10%

15%

20%

25%

30%

35%

40%





-33%

-30%

-17%

-17%

-10%

-5%

59%

67%

75%

81%

-40% -20% 0% 20% 40% 60% 80% 100%

Magazines

Newspaper

Linear TV

Outdoor

Radio

Cinema

Other online

Search

Online video

Social Media

-41%

-30%

-13%

-9%

-7%

-4%

73%

79%

82%

-60% -40% -20% 0% 20% 40% 60% 80% 100%

Magazines

Newspaper

Cinema

Outdoor

Linear TV

Radio

Social Media

Other online

Online video

10 January 2017


availability of targeted advertising inventory, and should be notable beneficiaries of

advertiser demand for this type of inventory.

Figure 29: Ability to target is growing in importance

to advertisers, now ranked #2

Figure 30: …from the third most important in our

last survey

Question: "What will drive the shift in the mix of your advertising spending on media over the next two years?"






Theme #3: Pending M&A deals highlight benefits of

vertical integration

The two large M&A transactions announced last year, AT&T's acquisition of Time Warner

and 21st Century Fox's acquisition of Sky, will go through their respective regulatory

reviews during 2017. Both will combine studio/network ownership with distribution assets

and, if approved, will focus industry peers on the potential benefits of scale and of vertical

integration. Whether these benefits actually materialise will only be evident over time but,

as we highlighted in our last report on Disney (see here), the critical medium term

battleground for network owners will be over control of distribution rights for major sports –

rights to distribute NFL, NBA and MLB content drives pricing for network affiliate fees and

advertising, and losing control over these rights would significantly impact long term

profitability.

In theory, scale and vertical integration give potential bidders for sports rights two

advantages: (i) more financial capacity; and (ii) direct customer relationships, which

provide additional monetisation opportunities, access to consumer data and an opportunity

to internalise distributors' margins.

This could make current licensees of sports rights which lack scale and/or vertical

integration (DIS and CBS) think very carefully about the merits of acquiring both, in our

view. This pressure could be particularly significant for DIS, given the size of ESPN and its

reliance on sports rights to sustain its price premium – for example, we argue that if the

T/TWX deal is consummated, DIS will face competition for sports rights from a rival with

3.5x its EBITDA and with >50m wireless customer relationships, and that it may therefore

regard the status quo as less attractive than it has historically.

Obviously DIS already has a strategy to increase its direct customer relationships – with its

stake in BAMTech and the launch of DisneyLife. These should enhance its ability to

monetise sports and other content globally over time, and may be enough to replicate its

competitors' vertically integrated models. However, it is also arguable that DIS' strategy

may struggle to deliver meaningful customer numbers in the four years before important

sports rights contracts will be put out for tender – the current MLB distribution rights

agreements expire in 2021; the NFL's expire in 2022; and the NBA's expire in 2025.

87%

71%

62%

51%

32%

3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Return onInvestment

Ability to TargetCustomers

Effectiveness Value for Money Abilitiy To MeasureImpressions

Other

82%

73%70%

43%

29%

4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Return onInvestment

Effectiveness Ability to TargetCustomers

Abilitiy To MeasureImpressions

Value for Money Other

https://plus.credit-suisse.com/r/V6dch11AF-WElY95

10 January 2017


In this context, we would argue that the T/TWX transaction increases the pressure on DIS

to consider a vertical deal of its own. The two obvious transactions would be (i) for DIS to

buy NFLX (see Disney report below); and (ii) for DIS to sell to AAPL. In absolute terms the

probability of both is low, but the strategic rationale appears to be growing.

Figure 31: Vertical integration is gaining traction in the media/cable industries

Source: Credit Suisse Research

Theme #4: Ad agency transparency issues continue

We remain constructive on the ad agency holding companies – the outlook for global

marketing expenditure and CMO intentions on agency fees remain healthy, and structural

headwinds from technology consultancies and online platforms remains modest. However,

we would highlight that last year's investigation into rebates in the US media buying

industry, carried out on behalf of the ANA, suggests that margins for some agencies in

digital media buying may be unsustainably high; and the report also appears to have

damaged client/agency trust, as we highlight in the charts below. This suggests to us that

clients may seek to put some downward pressure on agency fees over the next year, to

compensate for historic "overcharging", which could create an incremental headwind for

the top line of the large holding companies.

HBO

TNT

TBS

CNN

Cartoon

Network

Adult Swim

HGTV

Food Network

Fox Sports

Fox News

FX

FXX

National Geographic

Fox

(Broadcast)

Comedy

Central

Nickelodeon

MTV

Spike TV

Discovery

Channel

Science

Investigation

Discovery

Animal Planet

TLC

OWN

USA

Bravo

CNBC

NBC Sports

Network

MSNBC

NBC

(Broadcast)

Telemundo

(Broadcast)

Fox UniversalWarner

Bros.Sony Amazon DWA Param’t

Discovery

Netflix

NetflixComcast

HuluDisney MLB NFL NBA

ESPN

Disney XD

ABC Family

ABC

(Broadcast)

DisneyTime

WarnerViacom Fox Scripps CBSHulu

Set top box Smart TV Games console Tablet Smartphone

CBS

(Broadcast)

Showtime

Amazon

Apple YouTube

Comcast Charter AT&T Verizon HuluNetflix Amazon

Apple YouTube

DISH Cox Cab’vision

Orig

inat

ors

Agg

rega

tors

Dis

trib

utor

sD

evic

es

10 January 2017


Figure 32: Expectations for growth in global

marketing budgets is robust…

Figure 33: …and similarly for global advertising

budgets




Question: "Looking at your total advertising budget in 2017 vs 2016, by approximately how much do you expect it to grow/decline?"



Figure 34: Strong net balances of respondents

expect to increase spending on digital agencies and

market research, in contrast to media buying

Figure 35: The majority of respondents see agency

margins as "about right"

Question: "Directionally in 2017 vs 2016, how do you expect the total fees and commissions you pay to the following types of advertising/marketing services agency to change?"



Question: "Do you believe the profit margins of your agency partners are too high or too low?"



Figure 36: "General trust" in agencies is cited as the

biggest single concern by respondents

Figure 37: Client focus when changing agency

compensation is on improving performance

Question: "What concerns do you have regarding the issuance of rebates and agency transparency in US, if any?



Question: "If you plan to change, or have recently changed, your agency compensation agreements what will be/were your motivations?"



2%

6%

8%

20%

12%

33%

19%

0%

5%

10%

15%

20%

25%

30%

35%


Decline by 5%-10%



Grow by 5% -to10%

Grow more than10%

1%

6%

11%

19%

14%

31%

19%

0%

5%

10%

15%

20%

25%

30%

35%


Decline by 5%-10%



Grow by 5%-10%


-6%

0%

2%

4%

4%

8%

21%

40%

69%

-10% 0% 10% 20% 30% 40% 50% 60% 70% 80%

Media agency (planning/buying)

Other (please specify):

Healthcare Marketing

Full service advertising

PR

Direct Marketing

Creative advertising

Market research/data analytics

Interactive/Internet/Digital

25%

53%

5%

17%

0%

10%

20%

30%

40%

50%

60%

Too high About right Too low Not my concern

11%

30%

35%

40%

46%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Other (please specify)

Service/consulting agreements functioning ass a kickback

Unkown inventory markups from agency trading desks

Agency kickbacks (keeping portions of the rebate)

General trust in agency44%

47%

5% 5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

To reduce cost To improve agencyperformance

To simplify administration Other

10 January 2017


Theme #5: US tax rates fall, dollar stays strong

Reductions in US corporate rates under an incoming Trump administration should benefit

US Media/Cable companies, given high current tax rates and generally high domestic

exposure (see charts below). We would also highlight that Credit Suisse Fixed Income

Research expects the US dollar to remain strong versus major trading partners (see charts

below), which will further favor the generally high domestic earners in the group and also

suggests that overseas M&A by US based Media/Cable companies will remain attractive.

Figure 38: US Media/Cable are generally high tax-

paying sectors… Figure 39: …and predominantly focused on the US

Source: Credit Suisse estimates, company data Source: Credit Suisse estimates, company data

Figure 40: Credit Suisse expects EUR/USD parity… Figure 41: …a strengthening vs the British Pound…

Source: Credit Suisse Fixed Income Research Source: Credit Suisse Fixed Income Research

Figure 42: …and vs the Chinese Yuan… Figure 43: …but a weakening vs the Japanese Yen

Source: Credit Suisse Fixed Income Research Source: Credit Suisse Fixed Income Research

29.0%

31.0%

32.5%

32.7%

33.0%

33.2%

35.0%

35.0%

36.7%

37.1%

37.5%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0%

Discovery Communications

Time Warner Inc.

Viacom

Omnicom

21st Century Fox

CBS

The Walt Disney Company

Manchester United

DISH Network

Interpublic Group

Comcast

2017 tax rate

51%

59%

60%

70%

71%

75%

77%

86%

91%

100%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Discovery

Interpublic

Omnicom

Time Warner

Fox

Viacom

Disney

CBS

Comcast

DISH

Domestic % of revenues

1.05

1.03

1.00

0.97

0.98

0.99

1

1.01

1.02

1.03

1.04

1.05

1.06

Current 3m 12m

EUR/USD

1.23

1.20 1.21

0.97

1.02

1.07

1.12

1.17

1.22

1.27

Current 3m 12m

GBP/USD

6.94 7.017.33

0.97

1.97

2.97

3.97

4.97

5.97

6.97

7.97

Current 3m 12m

USD/CNY

117.42111.00 108.00

0.97

20.97

40.97

60.97

80.97

100.97

120.97

140.97

Current 3m 12m

USD/JPY

10 January 2017


Theme #6: Net neutrality is scrapped

The election of a Republican administration has had a significant positive impact on the

regulatory outlook for US ISPs, primarily because we expect Congress and the FCC to

work together to replace the 2015 Open Internet Order. This order enforces the principles

of net neutrality including that ISPs must enable access to all content without favoring or

blocking specific websites, and under Title II of the Telecommunications Act created the

possibility of direct price regulation.

Current Republican FCC Commissioners Pai & O'Rielly both oppose the enforcement of

net neutrality via Title II, and President-Elect Trump's advisers for his telecom agenda,

Jeffrey Eisenach and Mark Jaimson, are both staunch opponents of net neutrality. Given

the views of these officials and the incoming administration, we believe the FCC is likely to

look to replace the current standards enforcing Net Neutrality once the two vacant FCC

seats are filled.

A simple FCC majority is needed to repeal the Open Internet Order, and Republican

control over the Commission appears clear given Democratic Commissioner Rosenworcel

has not been re-confirmed by Congress and current Chairman Wheeler will be stepping

down before the Presidential Inauguration. This leaves two Republicans (Commissioners

Pai & O'Rielly) and only one Democrat (Commissioner Clyburn) on the FCC bench, and a

Republican administration and Congress responsible for nominating and confirming

candidates for the two vacant seats. This creates a high likelihood of a Republican

majority at the FCC after the confirmation process concludes in mid-2017, which would in

turn signal the end of the Open Internet Order, in our view.

Although a replacement for the Open Internet Order is likely, this does not necessarily

mean the principles of net neutrality will be completely abolished from all regulation.

Several ISPs including AT&T and Verizon have stated they support the principles

underlying Net Neutrality, but prefer their enforcement through congressional regulation

rather than Title II. Regardless of the future of net neutrality, the key benefit for ISPs

remains that the potential for retail rate regulation under Title II will be scrapped during

2017, lifting a significant regulatory burden.

10 January 2017


What happened in 2016? The S&P 500 Media index outperformed the S&P 500 Composite by 4% in 2016, after two

years of underperformance in 2014 and 2015. As we show in the charts below, the

outperformance was driven by TWX, CHTR, CBS and CMCSA, with the post-election rally

a significant contributor.

On top of the many stock-specific reasons for the index's performance last year, we would

highlight the following industry-level themes:

■ Structural trends stabilized – pay TV subscriber declines stopped getting worse, TV

advertising grew y/y, “virtual” MVPD launches started

■ Cable’s video share gains accelerated, particularly vs telcos (U-Verse & FiOS), and

cable looks set to grow video subs y/y in 2016

■ Two large M&A transactions (T/TWX, FOXA/SKYB) heightened expectations of further

consolidation in Media

■ Media/Cable are high tax paying industries; investors are starting to discount Trump-

era tax reductions

■ CHTR upgraded cost savings targets from the TWC deal

■ The election eased the “regulatory overhang” on US Cable, with the main focus on net

neutrality legislation, which is widely expected to be scrapped

■ Investors are taking a constructive view of Cable’s potential entry into the wireless

market in 2017

Figure 44: US Media outperformed the S&P 500

Composite by 4% in 2016…

Figure 45: …with all the outperformance coming

post the election

Source: Thomson Reuters, Credit Suisse estimates

Note: S&P 500 Media index includes CHTR & CMCSA. Full constituent list, and estimated weightings, please see appendix

Source: Thomson Reuters, Credit Suisse estimates

Note: S&P 500 Media index includes CHTR & CMCSA. Full constituent list, and estimated weightings, please see appendix

-17%

-16%

-15%

-14%

-12%

-6%

-1%

1%

1%

2%

3%

3%

8%

9%

10%

10%

10%

12%

14%

15%

22%

29%

35%

40%

42%

49%

-40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60%

LIONS GATE ENTM.'A'

TEGNA

VIACOM 'B'

NEWS 'A'

IMAX (NYS)

NATIONAL CINEMEDIA

WALT DISNEY

INTERPUBLIC GROUP

DISH NETWORK 'A'

ALPHABET 'A'

DISCOVERY COMMS.'A'


NETFLIX

REGAL ENTM.GP. 'A'


FACEBOOK CLASS A

APPLE

OMNICOM GROUP


CINEMARK HOLDINGS

COMCAST 'A'


CBS 'B'


CHARTER COMMS.CL.A

TIME WARNER

2016

-10%

-7%

-6%

-5%

-2%

-2%

0%

0%

2%

4%

4%

4%

4%

5%

5%

5%

6%

9%

9%

10%

10%

10%

10%

10%

14%

18%

-15% -10% -5% 0% 5% 10% 15% 20%

REGAL ENTM.GP. 'A'

FACEBOOK CLASS A

VIACOM 'B'

CINEMARK HOLDINGS

ALPHABET 'A'

NEWS 'A'

NETFLIX

IMAX (NYS)

DISH NETWORK 'A'


INTERPUBLIC GROUP

APPLE


OMNICOM GROUP


NATIONAL CINEMEDIA

DISCOVERY COMMS.'A'



CHARTER COMMS.CL.A

TIME WARNER

CBS 'B'

WALT DISNEY

COMCAST 'A'

TEGNA

LIONS GATE ENTM.'A'

Since Election (8 November)

10 January 2017


Recent trends in the US video market

Cord-cutting trends are stabilizing

The overall MVPD ecosystem has continued to shrink throughout 2016 (see Figure 48),

although this has been primarily driven by losses in DBS (DISH) & Telco (AT&T U-Verse),

while cable has been gaining share (see Figure 49). Sling TV is contributing meaningfully

to subscriber growth and that Q3 sub losses improve from -1.5% to -0.8% after including

our estimate for Sling TV subscribers (see Figure 47).

We estimate vMPVDs (Hulu, DirecTV Now, Sling) can significantly boost video subscriber

growth by offering more affordable bundles, improved consumer interfaces, and

significantly more VOD options. As broadband-only homes continue to grow, we estimate

vMVPDs can reach 80% penetration (c19m subscribers) by 2020 (see Figure 50),

contributing to overall subscriber growth in the video ecosystem (Figure 51).



Figure 47: Subscriber declines in 2016 stabilize after

including growth at Sling TV


Figure 48: Seasonal losses (ex-Sling) have hit their

highest level since recession

Figure 49: Cable is continuing to take share from

DBS & Telco


0

20,000

40,000

60,000

80,000

100,000

120,000

2001

2002

Q1

'03

Q2

'03

Q3

'03

Q4

'03

2003

Q1

'04

Q2

'04

Q3

'04

Q4

'04

Q1

'05

Q2

'05

Q3

'05

Q4

'05

Q1

'06

Q2

'06

Q3

'06

Q4

'06

Q1

'07

Q2

'07

Q3

'07

Q4

'07

Q1

'08

Q2

'08

Q3

'08

Q4

'08

Q1

'09

Q2

'09

Q3

'09

Q4

'09

Q1

'10

Q2

'10

Q3

'10

Q4

'10

Q1

'11

Q2

'11

Q3

'11

Q4

'11

Q1

'12

Q2

'12

Q3

'12

Q4

'12

Q1

'13

Q2

'13

Q3

'13

Q4

'13

Q1

'14

Q2

'14

Q3

'14

Q4

'14

Q1

'15

Q2

'15

Q3

'15

Q4

'15

Q1

'16

Q2

'16

Q3

'16

Cable DBS Telco

(2)%

(1)%

0%

1%

2%

3%

4%

5%

6%

7%

Q4

'04

Q2

'05

Q4

'05

Q2

'06

Q4

'06

Q2

'07

Q4

'07

Q2

'08

Q4

'08

Q2

'09

Q4

'09

Q2

'10

Q4

'10

Q2

'11

Q4

'11

Q2

'12

Q4

'12

Q2

'13

Q4

'13

Q2

'14

Q4

'14

Q2

'15

Q4

'15

Q2

'16



(626)

(371)

(99)(242)

(825)

(304)

(1,000)

(500)

-

500

1,000

1,500

2,000

2,500

Q1

'04

Q2

'04

Q3

'04

Q4

'04

Q1

'05

Q2

'05

Q3

'05

Q4

'05

Q1

'06

Q2

'06

Q3

'06

Q4

'06

Q1

'07

Q2

'07

Q3

'07

Q4

'07

Q1

'08

Q2

'08

Q3

'08

Q4

'08

Q1

'09

Q2

'09

Q3

'09

Q4

'09

Q1

'10

Q2

'10

Q3

'10

Q4

'10

Q1

'11

Q2

'11

Q3

'11

Q4

'11

Q1

'12

Q2

'12

Q3

'12

Q4

'12

Q1

'13

Q2

'13

Q3

'13

Q4

'13

Q1

'14

Q2

'14

Q3

'14

Q4

'14

Q1

'15

Q2

'15

Q3

'15

Q4

'15

Q1

'16

Q2

'16

Q3

'16

Net video subscriber additions/(losses) - actual by quarter

Seasonal losses are picking up again

(4,000)

(3,000)

(2,000)

(1,000)

-

1,000

2,000

3,000

4,000

Q4

'04

Q1

'05

Q2

'05

Q3

'05

Q4

'05

Q1

'06

Q2

'06

Q3

'06

Q4

'06

Q1

'07

Q2

'07

Q3

'07

Q4

'07

Q1

'08

Q2

'08

Q3

'08

Q4

'08

Q1

'09

Q2

'09

Q3

'09

Q4

'09

Q1

'10

Q2

'10

Q3

'10

Q4

'10

Q1

'11

Q2

'11

Q3

'11

Q4

'11

Q1

'12

Q2

'12

Q3

'12

Q4

'12

Q1

'13

Q2

'13

Q3

'13

Q4

'13

Q1

'14

Q2

'14

Q3

'14

Q4

'14

Q1

'15

Q2

'15

Q3

'15

Q4

'15

Q1

'16

Q2

'16

Q3

'16

LTM Net Additions/(Losses) - Cable LTM Net Additions/(Losses) - DBS

LTM Net Additions/(Losses) - Telco

10 January 2017


Figure 50: We expect vMVPDs to reach 80%

penetration of broadband-only homes by 2020

Figure 51: We estimate that growth of vMVPDs will

offset the decline of traditional MVPDs

Source: SNL Kagan, US Census, Company data, Credit Suisse estimates Source: SNL Kagan, Company data, Credit Suisse estimates

TV viewing on linear platforms

Linear TV usage has been recovering for most of 2016 as cord cutting has stabilized and

the viewing experience has improved through new consumer interfaces and networks'

experimentation with lower ad loads. As we show in Figure 54, the linear TV usage

generally improved throughout 2016, although the latest data shows a 2% decline in

November, driven by a hard comparison to November, 2015 with a decline of only 1%.

Figure 52: Daily usage of linear TV reached 281

minutes in November 2016, -2% y/y

Figure 53: Combined daily usage for linear, Netflix

and Hulu is stable over the last three years

Source: Nielsen, Credit Suisse estimates Source: Nielsen, comScore, Credit Suisse estimates

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

-

5,000

10,000

15,000

20,000

25,000

2015 2016 2017E 2018E 2019E 2020E

Broadband only homes vMVPD penetration

0

20,000

40,000

60,000

80,000

100,000

120,000

Q1

'07

Q2

'07

Q3

'07

Q4

'07

Q1

'08

Q2

'08

Q3

'08

Q4

'08

Q1

'09

Q2

'09

Q3

'09

Q4

'09

Q1

'10

Q2

'10

Q3

'10

Q4

'10

Q1

'11

Q2

'11

Q3

'11

Q4

'11

Q1

'12

Q2

'12

Q3

'12

Q4

'12

Q1

'13

Q2

'13

Q3

'13

Q4

'13

Q1

'14

Q2

'14

Q3

'14

Q4

'14

Q1

'15

Q2

'15

Q3

'15

Q4

'15

Q1

'16

Q2

'16

Q3

'16

4Q16

E1Q

17E

2Q17

E3Q

17E

4Q17

E1Q

18E

2Q18

E3Q

18E

4Q18

E1Q

19E

2Q19

E3Q

19E

4Q19

E1Q

20E

2Q20

E3Q

20E

4Q20

E

Traditional MVPDs vMVPDs

0

50

100

150

200

250

300

350

Oct

-11

Nov

-11

Dec

-11

Jan-

12F

eb-1

2M

ar-1

2A

pr-1

2M

ay-1

2Ju

n-12

Jul-1

2A

ug-1

2S

ep-1

2O

ct-1

2N

ov-1

2D

ec-1

2Ja

n-13

Feb

-13

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Sep

-13

Oct

-13

Nov

-13

Dec

-13

Jan-

14F

eb-1

4M

ar-1

4A

pr-1

4M

ay-1

4Ju

n-14

Jul-1

4A

ug-1

4S

ep-1

4O

ct-1

4N

ov-1

4D

ec-1

4Ja

n-15

Feb

-15

Mar

-15

Apr

-15

May

-15

Jun-

15Ju

l-15

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

Jan-

16F

eb-1

6M

ar-1

6A

pr-1

6M

ay-1

6Ju

n-16

Jul-1

6A

ug-1

6S

ep-1

6O

ct-1

6N

ov-1

6

Linear TV

0

50

100

150

200

250

300

350

Nov

-12

Dec

-12

Jan-

13F

eb-1

3M

ar-1

3A

pr-1

3M

ay-1

3Ju

n-13

Jul-1

3A

ug-1

3S

ep-1

3O

ct-1

3N

ov-1

3D

ec-1

3Ja

n-14

Feb

-14

Mar

-14

Apr

-14

May

-14

Jun-

14Ju

l-14

Aug

-14

Sep

-14

Oct

-14

Nov

-14

Dec

-14

Jan-

15F

eb-1

5M

ar-1

5A

pr-1

5M

ay-1

5Ju

n-15

Jul-1

5A

ug-1

5S

ep-1

5O

ct-1

5N

ov-1

5D

ec-1

5Ja

n-16

Feb

-16

Mar

-16

Apr

-16

May

-16

Jun-

16Ju

l-16

Aug

-16

Sep

-16

Oct

-16

Nov

-16

Linear TV Netflix PC streaming Hulu PC streaming

10 January 2017


Figure 54: Linear usage is declining again after a 1%

growth in August…

Figure 55: … and combined usage is showing a

similar trend

Source: Nielsen, Credit Suisse estimates Source: Nielsen, comScore, Credit Suisse estimates

Figure 56: Netflix daily desktop usage has fallen

sharply since Q1 2015… Figure 57: …while Hulu has continued to grow

Source: comScore, Credit Suisse estimates Source: comScore, Credit Suisse estimates

Figure 58: Linear TV's proportion of combined

viewing has been stable since mid-2015…

Figure 59: …and linear TV viewing remains

significantly larger than major SVOD platforms

Source: Nielsen, comScore, Credit Suisse estimates Source: Nielsen, comScore, Credit Suisse estimates

-8%

-6%

-4%

-2%

0%

2%

4%

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Sep

-13

Oct

-13

Nov

-13

Dec

-13

Jan-

14F

eb-1

4M

ar-1

4A

pr-1

4M

ay-1

4Ju

n-14

Jul-1

4A

ug-1

4S

ep-1

4O

ct-1

4N

ov-1

4D

ec-1

4Ja

n-15

Feb

-15

Mar

-15

Apr

-15

May

-15

Jun-

15Ju

l-15

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

Jan-

16F

eb-1

6M

ar-1

6A

pr-1

6M

ay-1

6Ju

n-16

Jul-1

6A

ug-1

6S

ep-1

6O

ct-1

6N

ov-1

6

y/y % change in Linear TV daily usage minutes 6-month moving average

Daily TV usage minutes have been recovering for most of 2016, with a 1% growth in August. However, the latest data shows usage was down 2% in November, 2016

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

Mar

-13

May

-13

Jul-1

3

Sep

-13

Nov

-13

Jan-

14

Mar

-14

May

-14

Jul-1

4

Sep

-14

Nov

-14

Jan-

15

Mar

-15

May

-15

Jul-1

5

Sep

-15

Nov

-15

Jan-

16

Mar

-16

May

-16

Jul-1

6

Sep

-16

Nov

-16

y/y % change in Linear TV + Netflix + Hulu minutes 6-month moving average

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Sep

-13

Oct

-13

Nov

-13

Dec

-13

Jan-

14F

eb-1

4M

ar-1

4A

pr-1

4M

ay-1

4Ju

n-14

Jul-1

4A

ug-1

4S

ep-1

4O

ct-1

4N

ov-1

4D

ec-1

4Ja

n-15

Feb

-15

Mar

-15

Apr

-15

May

-15

Jun-

15Ju

l-15

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

Jan-

16F

eb-1

6M

ar-1

6A

pr-1

6M

ay-1

6Ju

n-16

Jul-1

6A

ug-1

6S

ep-1

6O

ct-1

6N

ov-1

6

y/y % change in Netflix daily usage minutes 6-month moving average

Daily desktop usage minutes for Netflix has fallen sharply since the

+60% growth in Q1, and is now down 15% in November, 2016

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

160%

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Sep

-13

Oct

-13

Nov

-13

Dec

-13

Jan-

14F

eb-1

4M

ar-1

4A

pr-1

4M

ay-1

4Ju

n-14

Jul-1

4A

ug-1

4S

ep-1

4O

ct-1

4N

ov-1

4D

ec-1

4Ja

n-15

Feb

-15

Mar

-15

Apr

-15

May

-15

Jun-

15Ju

l-15

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

Jan-

16F

eb-1

6M

ar-1

6A

pr-1

6M

ay-1

6Ju

n-16

Jul-1

6A

ug-1

6S

ep-1

6O

ct-1

6N

ov-1

6

y/y % change in Hulu daily usage minutes 6-month moving average

80%

82%

84%

86%

88%

90%

92%

94%

Nov

-12

Jan-

13

Mar

-13

May

-13

Jul-1

3

Sep

-13

Nov

-13

Jan-

14

Mar

-14

May

-14

Jul-1

4

Sep

-14

Nov

-14

Jan-

15

Mar

-15

May

-15

Jul-1

5

Sep

-15

Nov

-15

Jan-

16

Mar

-16

May

-16

Jul-1

6

Sep

-16

Nov

-16

Linear TV proportion of all viewing

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Nov

-12

Jan-

13

Mar

-13

May

-13

Jul-1

3

Sep

-13

Nov

-13

Jan-

14

Mar

-14

May

-14

Jul-1

4

Sep

-14

Nov

-14

Jan-

15

Mar

-15

May

-15

Jul-1

5

Sep

-15

Nov

-15

Jan-

16

Mar

-16

May

-16

Jul-1

6

Sep

-16

Nov

-16

Hulu proportion of all viewing Linear TV proportion of all viewing Netflix proportion of all viewing

10 January 2017


Figure 60: Total traffic minutes of Netflix and Hulu

have been growing consistently since Q1 2015…

Figure 61: …while growth has slowed down

significantly

Source: comScore, Credit Suisse estimates Source: comScore, Credit Suisse estimates

Nielsen ratings for cable and broadcast networks

We display C3 ratings for major broadcast and cable networks in Figures 62 through

Figure 77 below. We note that the long term decline in TV ratings (see Figure 62 and

Figure 63) does not only indicate declining viewership but also reflects Nielsen's exclusion

of non-linear viewing sources (mobile, tablet, Smart TV, etc.) which have grown

substantially in the last several years. Nielsen's new Total Audience rating system, set to

launch in March 2017, has been previously delayed due to complaints from major network

groups regarding its accuracy and the lack of widespread participation among networks.

We believe its potential remains promising; however, as initial ratings from the system

have demonstrated average increases of 10%. Networks are also not waiting for the new

system during advertising negotiations, as ESPN demonstrated by securing the industry's

first out-of-home viewing deal in September 2016.

Figure 62: Long term broadcast total day C3 ratings Figure 63: Long term cable total day C3 ratings

Source: Nielsen, Credit Suisse estimates

Note: Duration-weighted average of major networks in each group based on the P18-49 demographic. Includes ABC, CBS, FOX, and NBC in "Big Four"; and CW, Telemundo, and Univision in "Others".


Note: Duration-weighted average of major networks in each demographic. Includes Adult Swim, AMC, BET, Bravo, CMT, Comedy Central, Fx, Fxx, IFC, Nick-at-nite, Spike TV, Syfy, TruTV, USA, and VH1 for P18-49; ESPN, ESPN2, Fox Sports 1 & 2, Golf Channel, NBC Sports Network, TBS, TNT, and Velocity for M18-49; and A&E, Animal Planet, CNN, Discovery Channel, Fox News, Investigation Discovery, MSNBC, Science, and TV Land for P25-54.

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16

Total Traffic Minutes (MM)

Hulu Netflix

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

Sep

-14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb

-15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

Jan-

16

Feb

-16

Mar

-16

Apr

-16

May

-16

Jun-

16

Jul-1

6

Aug

-16

Sep

-16

Oct

-16

Nov

-16

Total Traffic Minutes YoY

Hulu Netflix

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

09/20/2010 -09/26/2010

02/28/2011 -03/27/2011

11/28/2011 -12/25/2011

09/24/2012 -09/30/2012

02/25/2013 -03/31/2013

11/25/2013 -12/29/2013

09/22/2014 -09/28/2014

02/23/2015 -03/29/2015

11/30/2015 -12/27/2015

09/19/2016 -09/25/2016

Rebased

Big Four Others All

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

09/27/2010-

10/31/2010

04/25/2011-

05/29/2011

11/28/2011-

12/25/2011

06/25/2012-

07/29/2012

01/28/2013-

02/24/2013

08/26/2013-

09/29/2013

03/31/2014-

04/27/2014

10/27/2014-

11/30/2014

06/01/2015-

06/28/2015

12/28/2015-

01/31/2016

08/01/2016-

08/28/2016

Rebased

P18-49 M18-49 P25-54

http://www.adweek.com/news/television/nielsen-will-complete-its-total-audience-measurement-rollout-march-173586

http://variety.com/2017/tv/news/nielsen-measurement-total-content-tv-advertising-1201953370/

http://www.adweek.com/news/television/nielsens-new-coo-explains-why-total-audience-measurement-taking-so-long-170260

http://adage.com/article/media/a/306100/

10 January 2017


Figure 64: Broadcast total day C3 ratings – big four Figure 65: Broadcast primetime C3 ratings –big four

Source: Nielsen

Note: Total day C3 ratings based on P18-49 demographics for all networks.

Source: Nielsen

Note: Primetime C3 ratings based on P18-49 demographics for all networks.

Figure 66: Disney total day ratings Figure 67: Disney primetime ratings

Source: Nielsen, Credit Suisse Estimates

Note: Total day C3 ratings based on target demographics: M18-49 for ESPN, and ESPN2; P25-54 for A&E and Lifetime; P2-11 for Disney XD; and P12-17 for Freeform.


Note: Primetime C3 ratings based on target demographics: M18-49 for ESPN, and ESPN2; P25-54 for A&E and Lifetime; P2-11 for Disney XD; and P12-17 for Freeform.

Figure 68: 21st

Century Fox total day ratings Figure 69: 21st

Century Fox primetime ratings


Note: Total day C3 ratings based on target demographics: P18-49 for Fx, Fxx, and National Geographic; M18-49 Fox Sports 1 & 2; and P25-54 for Fox News.


Note: Primetime C3 ratings based on target demographics: P18-49 for Fx, Fxx, and National Geographic; M18-49 Fox Sports 1 & 2; and P25-54 for Fox News.

0.00

0.50

1.00

1.50

2.00

2.50

3.00

4Q10 2Q11 4Q11 2Q12 4Q12 2Q13 4Q13 2Q14 4Q14 2Q15 4Q15 2Q16

Four-quarter moving average

ABC CBS FOX NBC

0.00

0.50

1.00

1.50

2.00

2.50

3.00

4Q10 2Q11 4Q11 2Q12 4Q12 2Q13 4Q13 2Q14 4Q14 2Q15 4Q15 2Q16


ABC CBS FOX NBC

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

Q42010

Q12011

Q22011

Q32011

Q42011

Q12012

Q22012

Q32012

Q42012

Q12013

Q22013

Q32013

Q42013

Q12014

Q22014

Q32014

Q42014

Q12015

Q22015

Q32015

Q42015

Q12016

Q22016

Q32016


ESPN ESPN2 A&E NETWORK

LIFETIME TELEVISION DISNEY XD FREEFORM

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

Q42010

Q12011

Q22011

Q32011

Q42011

Q12012

Q22012

Q32012

Q42012

Q12013

Q22013

Q32013

Q42013

Q12014

Q22014

Q32014

Q42014

Q12015

Q22015

Q32015

Q42015

Q12016

Q22016

Q32016


ESPN ESPN2 A&E NETWORK

LIFETIME TELEVISION DISNEY XD FREEFORM

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

Q42010

Q12011

Q22011

Q32011

Q42011

Q12012

Q22012

Q32012

Q42012

Q12013

Q22013

Q32013

Q42013

Q12014

Q22014

Q32014

Q42014

Q12015

Q22015

Q32015

Q42015

Q12016

Q22016

Q32016


FOX NEWS CHANNEL FX

FXX NATIONAL GEOGRAPHIC CHNL

FOX SPORTS 1 FOX SPORTS 2

0.00

0.10

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Q12011

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Q32011

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Q12014

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Q12015

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Q32015

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Q12016

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Q32016


FOX NEWS CHANNEL FX

FXX NATIONAL GEOGRAPHIC CHNL

FOX SPORTS 1 FOX SPORTS 2

10 January 2017


Figure 70: Timer Warner total day ratings Figure 71: Timer Warner primetime ratings


Note: Total day C3 ratings based on target demographics: M18-49 for TNT and TBS; P18-49 for Adult Swim and TruTV; P25-54 for CNN; and P12-17 for Cartoon Network.


Note: Primetime C3 ratings based on target demographics: M18-49 for TNT and TBS; P18-49 for Adult Swim and TruTV; and P25-54 for CNN. Cartoon Network does not air during primetime.

Figure 72: Viacom total day ratings Figure 73: Viacom primetime ratings


Note: Total day C3 ratings based on target demographics: P2-11 for Nickelodeon; P18-49 for Comedy Central, Spike TV, and VH1; P12-34 for MTV, and P25-54 for TV Land.


Note: Primetime C3 ratings based on target demographics: P2-11 for Nickelodeon; P18-49 for Comedy Central, Spike TV, and VH1; P12-34 for MTV, and P25-54 for TV Land.

Figure 74: NBC total day ratings Figure 75: NBC primetime ratings


Note: Total day C3 ratings based on target demographics: P18-49 for USA and Bravo; M18-49 for NBC Sports Network; and P25-54 for MSNBC.


Note: Primetime C3 ratings based on target demographics: P18-49 for USA and Bravo; M18-49 for NBC Sports Network; and P25-54 for MSNBC.

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

Q4 2010 Q2 2011 Q4 2011 Q2 2012 Q4 2012 Q2 2013 Q4 2013 Q2 2014 Q4 2014 Q2 2015 Q4 2015 Q2 2016


TURNER NETWORK TELEVISION TBS NETWORK

ADULT SWIM TRUTV

CNN THE CARTOON NETWORK

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

Q4 2010 Q2 2011 Q4 2011 Q2 2012 Q4 2012 Q2 2013 Q4 2013 Q2 2014 Q4 2014 Q2 2015 Q4 2015 Q2 2016

Four-Quarter Moving Average

TURNER NETWORK TELEVISION TBS NETWORK

ADULT SWIM TRUTV

CNN

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

Q12010

Q32010

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Q32011

Q12012

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Q32016

Rebased

NICKELODEON COMEDY CENTRAL MTV

SPIKE TV VH1 TV LAND

0.00

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0.80

1.00

1.20

1.40

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Q12010

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Rebased

NICKELODEON COMEDY CENTRAL MTV

SPIKE TV VH1 TV LAND

0.00

0.05

0.10

0.15

0.20

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0.35

0.40

0.45

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Q42010

Q12011

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Q32011

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Q22012

Q32012

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Q22013

Q32013

Q42013

Q12014

Q22014

Q32014

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Q12015

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Q32015

Q42015

Q12016

Q22016

Q32016


USA NETWORK BRAVO NBC SPORTS NETWORK MSNBC

0.00

0.10

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0.40

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0.80

0.90

Q42010

Q12011

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Q12012

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Q12014

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USA NETWORK BRAVO NBC SPORTS NETWORK MSNBC

10 January 2017


Figure 76: Discovery total day ratings Figure 77: Discovery primetime ratings


Note: Total day C3 ratings based on target demographics: P25-54 for Discovery Channel, Investigation Discovery, and Animal Planet; and F18-49 for TLC and Oprah Winfrey Network.


Note: Primetime C3 ratings based on target demographics: P25-54 for Discovery Channel, Investigation Discovery, and Animal Planet; and F18-49 for TLC and Oprah Winfrey Network.

Positive advertising momentum continued

After a strong upfront, data from Standard Media Index (SMI) highlights healthy TV

advertising trends continued in Q3 2016 (see Figure 78 and Figure 79). Through Q4,

executives from media owners expressed confidence that demand trends for TV inventory

remained strong.

Figure 78: Advertising trends have improved in the

last three quarters

Figure 79: …with TV growing again and digital's

growth slowing

Source: Standard Media Index Source: Standard Media Index

0.00

0.05

0.10

0.15

0.20

0.25

0.30

Q4 2010 Q2 2011 Q4 2011 Q2 2012 Q4 2012 Q2 2013 Q4 2013 Q2 2014 Q4 2014 Q2 2015 Q4 2015 Q2 2016 Q4 2016


DISCOVERY CHANNEL INVESTIGATION DISCOVERY

ANIMAL PLANET TLC

OPRAH WINFREY NETWORK

0.00

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0.30

0.40

0.50

0.60

Q4 2010 Q2 2011 Q4 2011 Q2 2012 Q4 2012 Q2 2013 Q4 2013 Q2 2014 Q4 2014 Q2 2015 Q4 2015 Q2 2016 Q4 2016


DISCOVERY CHANNEL INVESTIGATION DISCOVERY

ANIMAL PLANET TLC


0%

10%

20%

30%

40%

50%

60%

Q4 2015 Q1 2016 Q2 2016 Q3 2016

Broadcast TV Cable TV Total TV Digital Total Advertising

0%

5%

10%

15%

20%

25%

30%

35%

40%

Broadcast TV Cable TV Total TV Digital Total Advertising

Q4 2015 Q1 2016 Q2 2016 Q3 2016

10 January 2017


Figure 80: Combined domestic advertising for the

"Big Seven" media owners has been improving

since Q2 2015

Figure 81: LTM combined domestic advertising for

the "Big Seven" media owners 2011-2016

Note: includes domestic advertising revenues across broadcast and cable networks (where applicable) for CMCSA, FOXA, DIS, CBS, TWX, DISCA, VIAB


Note: includes domestic advertising revenues across broadcast and cable networks (where applicable) for CMCSA, FOXA, DIS, CBS, TWX, DISCA, VIAB


6%

1%

10%

3%

-5%

2%

-7%

3%

11%

0%

0%

-1%

-7%

-4%

-1%

3%2%

0%

12%

-10%

-5%

0%

5%

10%

15%

Q1

2012

Q2

2012

Q3

2012

Q4

2012

Q1

2013

Q2

2013

Q3

2013

Q4

2013

Q1

2014

Q2

2014

Q3

2014

Q4

2014

Q1

2015

Q2

2015

Q3

2015

Q4

2015

Q1

2016

Q2

2016

Q3

2016

Combined US domestic advertising for the "Big Seven" improved sequentially during 2015

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

Q1

2011

Q2

2011

Q3

2011

Q4

2011

Q1

2012

Q2

2012

Q3

2012

Q4

2012

Q1

2013

Q2

2013

Q3

2013

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2013

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2014

Q2

2014

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2014

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2014

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2015

Q2

2015

Q3

2015

Q4

2015

Q1

2016

Q2

2016

Q3

2016

CMCSA DIS CBS FOXA VIAB TWX DISCA

10 January 2017


The Walt Disney Company (DIS)

Price (06 Jan 2017): US$108.98; Rating: OUTPERFORM; Target Price: US$125.00; Analyst: Omar Sheikh

Income Statement 10/16A 10/17E 10/18E 10/19E

Revenue (US$ m) 55,632.0 58,728.6 62,203.7 64,211.5 EBITDA 16,885 17,078 18,438 19,528 Depr. & amort. (2,527) (2,629) (2,714) (2,803) EBIT (US$) 14,358 14,449 15,724 16,725 Net interest exp (260) (483) (501) (527) PBT (US$) 14,868 14,968 16,279 17,308 Income taxes (5,078) (5,112) (5,560) (5,911) Profit after tax 9,790 9,856 10,719 11,397 Other NPAT adjustments 19 0 0 0

Cash Flow 10/16A 10/17E 10/18E 10/19E

Cash flow from operations 13,213 12,432 13,795 14,580 CAPEX (4,773) (2,624) (2,461) (2,593) Free cashflow to the firm 8,440 9,809 11,334 11,987 Cash flow from investments (5,758) (2,624) (2,461) (2,593) Net share issue(/repurchase) (7,499) (10,000) (12,000) (12,360) Dividends paid (2,313) (2,485) (2,617) (2,730) Cashflow from financing activities (9,825) (12,849) (14,981) (15,454) Effect of exchange rates (123) 0 0 0 Changes in Net Cash/Debt (2,493) (3,041) (3,647) (3,467) Net debt at start 13,067 15,560 18,601 22,248 Change in net debt 2,493 3,041 3,647 3,467 Net debt at end 15,560 18,601 22,248 25,715

Balance Sheet (US$) 10/16A 10/17E 10/18E 10/19E

Cash & cash equivalents 4,610 3,000 3,000 3,000 Account receivables 9,065 8,624 8,823 8,787 Other current assets 1,901 1,973 2,050 2,132 Total fixed assets 27,349 27,569 27,546 27,572 Investment securities 1,797 1,797 1,797 1,797 Total assets 92,033 90,671 91,062 91,232 Total current liabilities 16,842 16,747 15,409 16,529 Shareholder equity 43,265 40,225 35,904 31,775 Total liabilities and equity 92,033 90,671 91,062 91,232 Net debt 15,560 18,601 22,248 25,715

Per share 10/16A 10/17E 10/18E 10/19E

No. of shares (wtd avg) 1,639 1,591 1,523 1,444 CS adj. EPS 5.72 5.94 6.76 7.59 Prev. EPS (US$) 5.75 6.00 6.79 7.58 Dividend (US$) 1.42 1.56 1.72 1.89 Free cash flow per share 5.15 6.17 7.44 8.30

Earnings 10/16A 10/17E 10/18E 10/19E

Sales growth (%) 6.0 5.6 5.9 3.2 EBIT growth (%) 8.6 0.6 8.8 6.4 Net profit growth (%) 6.4 0.8 9.0 6.5 EPS growth (%) 11.0 3.8 13.9 12.2 EBITDA margin (%) 30.4 29.1 29.6 30.4 EBIT margin (%) 25.8 24.6 25.3 26.0 Pretax margin (%) 26.7 25.5 26.2 27.0 Net margin (%) 16.8 16.1 16.6 17.1

Valuation 10/16A 10/17E 10/18E 10/19E

EV/EBITDA (x) 11.2 11.2 10.6 10.2 P/E (x) 19.1 18.4 16.1 14.4

Returns 10/16A 10/17E 10/18E 10/19E

ROIC (%) 0.2 0.2 0.2 0.2

Gearing 10/16A 10/17E 10/18E 10/19E

Net debt/equity (%) 32.9 42.0 55.7 71.8

Quarterly EPS Q1 Q2 Q3 Q4 2016A 1.63 1.36 1.62 1.10 2017E 1.64 1.52 1.83 0.99 2018E - - - -

Company Background

The Walt Disney Company, together with its subsidiaries, is a diversified worldwide entertainment company. The Company operates in four segments: Media Networks, Parks and Resorts, Studio Entertainment, and Consumer Products & Interactive Media.

Blue/Grey Sky Scenario

Our Blue Sky Scenario (US$) 148.00

Our Blue Sky valuation is $148, which equates to 14.5x 2017 EV/EBITDA, and includes a 100bp addition to 2017-20 Cable Networks sub growth.

Our Grey Sky Scenario (US$) 102.00

Our Grey Sky valuation is $102, which equates to 10.5x 2017 EV/EBITDA, and includes a 100bp reduction in Cable Networks sub growth.

Share price performance

On 06-Jan-2017 the S&P 500 INDEX closed at 2276.98

Daily Jan08, 2016 - Jan06, 2017, 01/08/16 = US$99.25

Source: Company data, Thomson Reuters, Credit Suisse estimates

10 January 2017


Key Charts

Figure 82: Disney revenue mix 2017E Figure 83: Disney operating income mix 2017E


Figure 84: Disney segment revenue trend 2005-18E Figure 85: Disney segment EBIT 2005-18E


Figure 86: Disney Cable Networks revenue 2005-

2020E

Figure 87: Disney average license fee per sub. per

month 2004-15


Cable Networks29%

Broadcasting12%

Theme Parks & Resorts32%

Studio Entertainment15%

Consumer Products & Interactive Media

10%

Interactive Media2%

Cable Networks41%

Broadcasting8%




12%

Interactive Media1%

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E

Cable Networks Broadcasting Parks & Resorts Studio Entertainment Consumer Products & Interactive Media

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

$20,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E


$0

$5,000

$10,000

$15,000

$20,000

$25,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E

Affiliate fees Advertising revenue Other revenue

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

ESPN ESPN 2 ESPN News ESPN U ESPN Classic Sports

10 January 2017


21st Century Fox Inc. (FOXA)

Price (06 Jan 2017): US$29.52; Rating: OUTPERFORM; Target Price: (from US$34.00) US$37.00; Analyst: Omar Sheikh


Revenue (US$ m) 27,326.0 29,326.9 31,361.9 32,588.2 EBITDA 6,597 7,228 7,617 8,496 Depr. & amort. (605) (614) (623) (632) EBIT (US$) 5,992 6,614 6,994 7,864 Net interest exp (1,146) (1,128) (1,228) (1,228) PBT (US$) 4,154 5,504 6,194 7,473 Income taxes (1,130) (1,816) (2,106) (2,616) Profit after tax 3,024 3,687 4,088 4,858 Other NPAT adjustments (466) (115) 0 0

Cash Flow 6/16A 6/17E 6/18E 6/19E

Cash flow from operations 3,048 4,375 3,658 4,036 CAPEX (263) (270) (275) (280) Free cashflow to the firm 2,785 4,106 3,383 3,756 Cash flow from investments (1,638) (231) (236) (241) Net share issue(/repurchase) (4,892) (2,762) (2,208) (2,483) Dividends paid (821) (653) (622) (652) Cashflow from financing activities (6,016) (3,415) (2,831) (3,135) Effect of exchange rates (64) 0 0 0 Changes in Net Cash/Debt (4,495) 729 591 660 Net debt at start 10,806 15,301 14,572 13,981 Change in net debt 4,495 (729) (591) (660) Net debt at end 15,301 14,572 13,981 13,321


Cash & cash equivalents 4,424 5,222 5,813 6,473 Account receivables 6,258 6,672 7,135 7,414 Other current assets 976 451 483 501 Total fixed assets 1,692 1,778 1,850 1,916 Investment securities 446 485 524 563 Total assets 48,365 48,783 50,695 52,053 Total current liabilities 7,068 6,664 6,682 6,314 Shareholder equity 13,661 13,633 14,591 16,013 Total liabilities and equity 48,365 48,783 50,695 52,053 Net debt 15,301 14,572 13,981 13,321

Per share 6/16A 6/17E 6/18E 6/19E

No. of shares (wtd avg) 1,945 1,814 1,728 1,647 CS adj. EPS 1.66 1.93 2.19 2.77 Prev. EPS (US$) - 1.92 - - Dividend (US$) 0.30 0.36 0.36 0.40 Free cash flow per share 1.43 2.26 1.96 2.28

Earnings 6/16A 6/17E 6/18E 6/19E

Sales growth (%) 1.4 7.3 6.9 3.9 EBIT growth (%) 2.0 10.4 5.8 12.4 Net profit growth (%) (11.2) 8.4 8.2 20.3 EPS growth (%) (2.7) 16.3 13.6 26.2 EBITDA margin (%) 24.1 24.6 24.3 26.1 EBIT margin (%) 21.9 22.6 22.3 24.1 Pretax margin (%) 15.2 18.8 19.8 22.9 Net margin (%) 11.8 11.9 12.1 14.0

Valuation 6/16A 6/17E 6/18E 6/19E

EV/EBITDA (x) 10.5 9.5 8.9 7.9 P/E (x) 17.8 15.3 13.5 10.7

Returns 6/16A 6/17E 6/18E 6/19E

ROIC (%) 0.1 0.1 0.2 0.2

Gearing 6/16A 6/17E 6/18E 6/19E

Net debt/equity (%) 99.1 94.6 85.4 74.9


Company Background

21st Century Fox is an American global media company that operates in four segments, 1) Filmed entertainment, 2) Television Broadcast, 3) Cable Networks, and 4) Corporate & Other. It also owns 39% of SkyB, and 30% of Hulu.


Our Blue Sky Scenario (US$) (from 38.00) 42.00

Our Blue Sky valuation is $42, based on our SOTP valuation with a 11.0x core Fox 2017 EV/EBITDA multiple.

Our Grey Sky Scenario (US$) (from 30.00) 27.00

Our Grey Sky valuation is $27, based on our SOTP valuation with an 7.0x core Fox 2017 EV/EBITDA multiple.



Daily Jan08, 2016 - Jan06, 2017, 01/08/16 = US$25.89


10 January 2017


Key Charts

Figure 88: Fox operating income mix 2017E Figure 89: Fox Cable Networks revenue 2009-17E


Figure 90: Fox Cable Networks EBITDA 2009-17E Figure 91: Fox Broadcasting Revenue 2010-17E


Figure 92: Fox Net Debt/EBITDA 2010-17E

Figure 93: Fox Filmed Entertainment EBITDA

margins


Cable Network Programming

75%Television11%

Filmed Entertainment14%

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E

US revenue International revenue

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000


US Cable Networks EBITDA International Cable Networks EBITDA

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

2010 2011 2012 2013 2014 2015 2016 2017E

FBC Ad Revenue O&O Ad Revenue Retrans Revenue Other & MyNetwork TV

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

2010 2011 2012 2013 2014 2015 2016 2017E

Net Leverage

0%

5%

10%

15%

20%

25%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E

Filmed Entertainment EBITDA margins %

10 January 2017


CBS Corporation (CBS)

Price (06 Jan 2017): US$64.29; Rating: RESTRICTED; Target Price: Analyst: Omar Sheikh


Revenue (US$ m) 13,886.0 14,561.9 14,957.9 15,695.4 EBITDA 3,107 3,429 3,562 3,954 Depr. & amort. (264) (265) (270) (273) EBIT (US$) 2,843 3,164 3,293 3,681 Net interest exp (368) (402) (436) (407) Associates - - - - Other adj. (452) 9 0 0 PBT (US$) 2,023 2,772 2,857 3,274 Income taxes (587) (915) (948) (1,097) Profit after tax 1,436 1,857 1,908 2,177 Minorities -0 -0 -0 -0 Preferred dividends - - - - Associates & other 182 (69) (23) (23) Net profit (US$) 1,618 1,788 1,885 2,154 Other NPAT adjustments (215) 46 0 0 Reported net income 1,403 1,834 1,885 2,154

Cash Flow 12/15A 12/16E 12/17E 12/18E

EBIT 2,843 3,164 3,293 3,681 Net interest (368) (402) (436) (407) Cash taxes paid - - - - Change in working capital (1,018) (1,277) (403) (567) Other cash & non-cash items (63) (275) (313) (458) Cash flow from operations 1,394 1,211 2,141 2,249 CAPEX (168) (199) (205) (211) Free cashflow to the firm 1,226 1,013 1,936 2,038 Acquisitions (15) 0 0 0 Divestments 382 0 0 0 Other investment/(outflows) (20) (98) (98) (98) Cash flow from investments 154 (297) (303) (309) Net share issue(/repurchase) (2,813) (2,000) (2,000) (1,000) Dividends paid (300) (290) (289) (308) Issuance (retirement) of debt 1,343 1,452 451 (632) Other (1,219) (1,452) (451) 632 Cashflow from financing activities (2,989) (2,290) (2,289) (1,308) Effect of exchange rates - - - - Changes in Net Cash/Debt (1,441) (1,375) (451) 632 Net debt at start 6,684 8,125 9,500 9,951 Change in net debt 1,441 1,375 451 (632) Net debt at end 8,125 9,500 9,951 9,319


Assets Cash & cash equivalents 323 400 400 400 Account receivables 3,628 4,369 4,487 4,709 Inventory 1,271 2,184 2,543 2,982 Other current assets 525 585 601 631 Total current assets 5,747 7,538 8,032 8,722 Total fixed assets 1,405 1,358 1,308 1,259 Intangible assets and goodwill 11,995 11,976 11,961 11,948 Investment securities - - - - Other assets 4,618 4,811 5,078 5,401 Total assets 23,765 25,683 26,378 27,329 Liabilities Accounts payables 192 198 203 209 Short-term debt 0 960 1,809 1,486 Other short term liabilities 3,368 3,799 3,885 4,002 Total current liabilities 3,560 4,958 5,897 5,697 Long-term debt 8,226 8,718 8,320 8,011 Other liabilities 6,416 6,900 7,458 8,072 Total liabilities 18,202 20,576 21,675 21,780

Shareholder equity 5,563 5,107 4,703 5,549 Minority interests 0 0 0 0 Total liabilities and equity 23,765 25,683 26,378 27,329 Net debt 8,125 9,500 9,951 9,319

Per share 12/15A 12/16E 12/17E 12/18E

No. of shares (wtd avg) 489 437 404 392 CS adj. EPS 3.31 4.09 4.67 5.50 Prev. EPS (US$) - - - - Dividend (US$) 0.60 0.66 0.72 0.79 Dividend payout ratio 18.13 16.21 15.33 14.31 Free cash flow per share 2.51 2.32 4.79 5.21

Earnings 12/15A 12/16E 12/17E 12/18E

Sales growth (%) 0.6 4.9 2.7 4.9 EBIT growth (%) (4.4) 11.3 4.1 11.8 Net profit growth (%) (2.7) 10.5 5.4 14.3 EPS growth (%) 11.6 23.6 14.2 17.9 EBITDA margin (%) 22.4 23.5 23.8 25.2 EBIT margin (%) 20.5 21.7 22.0 23.5 Pretax margin (%) 14.6 19.0 19.1 20.9 Net margin (%) 11.7 12.3 12.6 13.7

Valuation 12/15A 12/16E 12/17E 12/18E

EV/Sales (x) 2.75 2.72 2.68 2.51 EV/EBITDA (x) 12.3 11.6 11.2 10.0 EV/EBIT (x) 13.5 12.5 12.2 10.7 P/E (x) 19.4 15.7 13.8 11.7 Price to book (x) 5.6 5.4 5.5 4.5 Asset turnover 0.6 0.6 0.6 0.6

Returns 12/15A 12/16E 12/17E 12/18E

ROE stated-return on (%) 22.4 34.4 38.4 42.0 ROIC (%) 0.1 0.1 0.2 0.2 Interest burden (%) 0.71 0.88 0.87 0.89 Tax rate (%) 29.0 33.0 33.2 33.5 Financial leverage (%) 1.52 1.94 2.20 1.75

Gearing 12/15A 12/16E 12/17E 12/18E

Net debt/equity (%) 146.1 186.0 211.6 167.9 Net Debt to EBITDA (x) 2.6 2.8 2.8 2.4 Interest coverage ratio (X) 7.7 7.9 7.6 9.0

Quarterly EPS Q1 Q2 Q3 Q4

2015A 0.78 0.74 0.88 0.92 2016E 1.02 0.93 1.05 1.02 2017E - - - -



Daily Jan08, 2016 - Jan06, 2017, 01/08/16 = US$46.46


10 January 2017


Key Charts

Figure 94: CBS revenue mix 2016E Figure 95: CBS adj. operating income mix 2016E


Figure 96: CBS revenue by type 2016E Figure 97: CBS revenue by type 2013-20E


Entertainment60%

Cable Networks14%

Publishing5%

Local Media12%

Radio9%

Entertainment43%

Cable Networks27%

Publishing3%

Local Media18%

Radio9%

Advertising42%

TV Content Licensing21%

Affiliate fees, retrans & reverse comp.

21%

Other16%

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

$20,000

2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Advertising TV Content Licensing Affiliate fees, retrans & reverse comp. Other

10 January 2017


Time Warner Inc. (TWX)



Revenue (US$ m) 28,118.0 29,222.6 30,975.4 32,562.7 EBITDA 7,604 8,276 8,828 9,586 Depr. & amort. (681) (703) (730) (756) EBIT (US$) 6,923 7,573 8,097 8,830 Net interest exp (1,163) (1,171) (1,255) (1,218) PBT (US$) 5,532 6,123 6,674 7,519 Income taxes (1,651) (1,583) (2,069) (2,331) Profit after tax 3,881 4,539 4,605 5,188 Other NPAT adjustments (148) (67) 0 0

Cash Flow 12/15A 12/16E 12/17E 12/18E

Cash flow from operations 3,851 4,755 5,051 5,684 CAPEX (269) (447) (461) (476) Free cashflow to the firm 3,582 4,308 4,590 5,208 Cash flow from investments (993) (861) (875) (890) Net share issue(/repurchase) (3,632) (2,289) 0 0 Dividends paid (1,150) (1,279) (1,316) (1,382) Cashflow from financing activities (4,724) (3,567) (1,316) (1,382) Effect of exchange rates - - - - Changes in Net Cash/Debt (1,874) 327 2,860 3,413 Net debt at start 19,763 21,637 21,310 18,450 Change in net debt 1,874 (327) (2,860) (3,413) Net debt at end 21,637 21,310 18,450 15,038


Cash & cash equivalents 2,155 3,161 5,510 8,311 Account receivables 7,411 7,410 7,545 7,606 Other current assets 1,194 1,226 1,291 1,339 Total fixed assets 2,596 2,521 2,436 2,344 Investment securities 1,254 1,254 1,254 1,254 Total assets 63,848 64,800 67,389 70,331 Total current liabilities 8,002 7,381 7,554 7,617 Shareholder equity 23,619 24,570 27,860 31,668 Total liabilities and equity 63,848 64,800 67,389 70,331 Net debt 21,637 21,310 18,450 15,038

Per share 12/15A 12/16E 12/17E 12/18E

No. of shares (wtd avg) 830 794 778 778 CS adj. EPS 4.75 5.77 5.92 6.67 Prev. EPS (US$) - - - - Dividend (US$) 1.40 1.61 1.69 1.78 Free cash flow per share 4.32 5.42 5.90 6.69

Earnings 12/15A 12/16E 12/17E 12/18E


Valuation 12/15A 12/16E 12/17E 12/18E

EV/EBITDA (x) 12.5 11.4 10.4 9.2 P/E (x) 19.9 16.4 16.0 14.2

Returns 12/15A 12/16E 12/17E 12/18E

ROIC (%) 0.1 0.1 0.1 0.1

Gearing 12/15A 12/16E 12/17E 12/18E

Net debt/equity (%) 91.6 86.7 66.2 47.5


Company Background

Time Warner is a media & entertainment company. It has 3 reporting segments: Networks, consisting of cable television networks; Filmed Entertainment, consisting of feature film, television and home video production & distribution & Publishing.



Our Blue Sky valuation is the same as our Target Price of $107.5, given AT&T's offer price acts as a ceiling on further upside.


Our Grey Sky valuation is $80, which values the stock at 10.1x 2016 EV/EBITDA.



Daily Jan08, 2016 - Jan06, 2017, 01/08/16 = US$71.17


10 January 2017


Key Charts

Figure 98: Time Warner revenue mix 2016E

Figure 99: Time Warner adj. operating income mix

2016E


Figure 100: Time Warner revenue mix 2011-20E

Figure 101: Time Warner adj. operating income

2011-20E


Figure 102: HBO Revenue Mix 2016E Figure 103: Time Warner Adj. EPS 2008-18E


Warner Bros43%

Turner38%

HBO19%

Warner Bros21%

Turner 55%

HBO24%

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Subscription Advertising Content Other

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Warner Bros Turner HBO

Subscription85%

Content15%

$1.42 $1.84

$2.41

$2.89 $2.94

$3.51

$4.15

$4.75

$5.77 $5.92

$6.67

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E

Time Warner adj EPS

10 January 2017


Viacom Inc. (VIAB)



Revenue (US$ m) 13,268.0 12,499.5 13,141.1 13,823.8 EBITDA 4,142 2,948 3,337 3,628 Depr. & amort. (222) (224) (227) (229) EBIT (US$) 3,920 2,723 3,111 3,399 Net interest exp (657) (616) (579) (544) Associates 102 90 94 97 Other adj. (656) (1) 0 0 PBT (US$) 2,709 2,196 2,625 2,952 Income taxes (501) (736) (853) (959) Profit after tax 2,208 1,461 1,772 1,992 Minorities (80) (40) (83) (85) Preferred dividends - - - - Associates & other 82 48 0 0 Net profit (US$) 2,210 1,469 1,689 1,908 Other NPAT adjustments (288) (48) 0 0 Reported net income 1,922 1,421 1,689 1,908

Cash Flow 9/15A 9/16E 9/17E 9/18E

EBIT 3,920 2,723 3,111 3,399 Net interest (657) (616) (579) (544) Cash taxes paid - - - - Change in working capital (4,760) (4,999) (5,152) (5,211) Other cash & non-cash items 3,810 4,514 4,399 4,296 Cash flow from operations 2,313 1,622 1,779 1,940 CAPEX (99) (146) (151) (155) Free cashflow to the firm 2,214 1,476 1,629 1,785 Acquisitions - - - - Divestments - - - - Other investment/(outflows) (115) 0 0 0 Cash flow from investments (257) (146) (151) (155) Net share issue(/repurchase) (1,548) 0 0 0 Dividends paid (564) (558) (318) (318) Issuance (retirement) of debt - - - - Other 49 19 0 0 Cashflow from financing activities (2,063) (539) (318) (318) Effect of exchange rates (73) 0 0 0 Changes in Net Cash/Debt (80) 937 1,310 1,467 Net debt at start 11,699 11,779 10,842 9,531 Change in net debt 80 (937) (1,310) (1,467) Net debt at end 11,779 10,842 9,531 8,065


Assets Cash & cash equivalents 506 1,056 1,470 1,940 Account receivables 2,807 2,644 2,780 2,925 Inventory 786 823 844 878 Other current assets 559 585 601 625 Total current assets 4,658 5,108 5,695 6,367 Total fixed assets 4,563 4,670 4,709 4,801 Intangible assets and goodwill 11,796 11,765 11,735 11,708 Investment securities - - - - Other assets 1,200 1,200 1,200 1,200 Total assets 22,217 22,744 23,339 24,076 Liabilities Accounts payables 506 530 544 565 Short-term debt 0 0 0 0 Other short term liabilities 3,348 4,573 4,260 3,298 Total current liabilities 3,854 5,102 4,804 3,863 Long-term debt 12,267 10,584 10,006 10,005 Other liabilities 2,278 2,377 2,477 2,567 Total liabilities 18,399 18,063 17,287 16,436


Per share 9/15A 9/16E 9/17E 9/18E


Earnings 9/15A 9/16E 9/17E 9/18E

Sales growth (%) (3.7) (5.8) 5.1 5.2 EBIT growth (%) (5.0) (30.5) 14.2 9.3 Net profit growth (%) (7.0) (33.5) 15.0 12.9 EPS growth (%) 0.8 (32.4) 15.3 12.9 EBITDA margin (%) 31.2 23.6 25.4 26.2 EBIT margin (%) 29.5 21.8 23.7 24.6 Pretax margin (%) 20.4 17.6 20.0 21.4 Net margin (%) 16.7 11.7 12.9 13.8

Valuation 9/15A 9/16E 9/17E 9/18E


Returns 9/15A 9/16E 9/17E 9/18E


Gearing 9/15A 9/16E 9/17E 9/18E



2015A 1.29 1.16 1.47 1.54 2016E 1.18 0.76 1.05 0.70 2017E - - - -



Daily Jan08, 2016 - Jan06, 2017, 01/08/16 = US$40.98


10 January 2017


Key Charts

Figure 104: VIAB adj. operating income mix 2017E Figure 105: VIAB US revenue by network 2009-17E


Figure 106: VIAB Cable Networks revenue 2008-17E

Figure 107: VIA Cable Networks geographic revenue

trend 2011-17E


Cable Networks100%

$0.0

$1,000.0

$2,000.0

$3,000.0

$4,000.0

$5,000.0

$6,000.0

$7,000.0

$8,000.0

$9,000.0

2009 2010 2011 2012 2013 2014 2015 2016E 2017E

Nickelodeon MTV Comedy Central Spike Other

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E

Advertising Affiliate Other

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

2011 2012 2013 2014 2015 2016E 2017E

Domestic Revenues International Revenues

10 January 2017


Discovery Communications (DISCA)

Price (06 Jan 2017): US$27.48; Rating: (from NEUTRAL) UNDERPERFORM; Target Price: (from US$25.00) US$23.00; Analyst: Omar Sheikh


Revenue (US$ m) 6,394.0 6,532.1 6,935.5 7,551.6 EBITDA 2,398 2,477 2,435 2,629 Depr. & amort. (330) (316) (309) (309) EBIT (US$) 1,985 2,056 2,078 2,272 Net interest exp (330) (359) (360) (349) PBT (US$) 1,559 1,637 1,718 1,924 Income taxes (511) (458) (498) (558) Profit after tax 1,048 1,179 1,220 1,366 Other NPAT adjustments (113) (109) (109) (109)

Cash Flow 12/15A 12/16E 12/17E 12/18E

Cash flow from operations 1,277 1,474 1,573 1,712 CAPEX (103) (124) (136) (150) Free cashflow to the firm 1,174 1,350 1,437 1,563 Cash flow from investments (301) (124) (136) (150) Net share issue(/repurchase) (945) (1,291) (1,047) (1,047) Dividends paid 0 0 0 0 Cashflow from financing activities (1,528) (1,791) (1,437) (1,563) Effect of exchange rates (51) 0 0 0 Changes in Net Cash/Debt (603) (441) 0 (0) Net debt at start 6,742 7,345 7,786 7,786 Change in net debt 603 441 (0) 0 Net debt at end 7,345 7,786 7,786 7,786


Cash & cash equivalents 390 500 500 500 Account receivables 1,479 1,527 1,639 1,803 Other current assets 414 421 463 507 Total fixed assets 2,518 2,621 2,596 2,524 Investment securities - - - - Total assets 15,864 15,918 15,949 16,010 Total current liabilities 1,579 1,483 1,636 1,789 Shareholder equity 5,451 5,338 5,511 5,830 Total liabilities and equity 15,864 15,918 15,949 16,010 Net debt 7,345 7,786 7,786 7,786

Per share 12/15A 12/16E 12/17E 12/18E


Earnings 12/15A 12/16E 12/17E 12/18E

Sales growth (%) 2.1 2.2 6.2 8.9 EBIT growth (%) (3.7) 3.6 1.1 9.4 Net profit growth (%) (9.3) 10.1 2.1 11.3 EPS growth (%) (4.4) 17.5 3.8 14.3 EBITDA margin (%) 37.5 37.9 35.1 34.8 EBIT margin (%) 31.0 31.5 30.0 30.1 Pretax margin (%) 24.4 25.1 24.8 25.5 Net margin (%) 17.9 19.3 18.6 19.0

Valuation 12/15A 12/16E 12/17E 12/18E

EV/EBITDA (x) 10.2 9.9 10.0 9.3 P/E (x) 15.6 13.3 12.8 11.2

Returns 12/15A 12/16E 12/17E 12/18E

ROIC (%) 0.1 0.1 0.1 0.1

Gearing 12/15A 12/16E 12/17E 12/18E

Net debt/equity (%) 129.0 139.6 135.4 128.3


Company Background

Discovery Communications Inc. is a global media & entertainment company that provides programming across multiple distribution platforms worldwide. It operates in 3 segments: U.S. Networks, International Networks, and Education & Other.


Our Blue Sky Scenario (US$) (from 31.00) 28.00

Our Blue Sky valuation is $28, based on a 100bp improvement in both U.S. Networks and International Networks sub growth, and a 10x 2017 EV/EBITDA multiple.

Our Grey Sky Scenario (US$) (from 21.00) 19.00

Our Grey Sky valuation is $19, based on a 100bp reduction in both U.S. Networks and International Networks sub growth, and an 8x 2017 EV/EBITDA multiple.



Daily Jan08, 2016 - Jan06, 2017, 01/08/16 = US$26.01


10 January 2017


Key Charts

Figure 108: DISCA Adj. OIBDA mix 2016E Figure 109: DISCA revenue by type 2008-17E


Figure 110: DISCA revenue mix 2008-17E Figure 111: US Networks revenue trend 2008-17E


Figure 112: Int'l Networks revenue trend 2009-17E Figure 113: Int'l Networks OIBDA margins 2009-17E


U.S. Networks68%

International Networks32%

Education & Other0%

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E

Distribution Revenue Advertising Revenue Other Revenue

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E

U.S. Networks International Networks Education & Other

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E

U.S. Distribution Revenue U.S. Ad Revenue Other Revenue

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

2009 2010 2011 2012 2013 2014 2015 2016E 2017E

International distribution revenue International advertising revenue International other revenue

-10%

0%

10%

20%

30%

40%

50%

2009 2010 2011 2012 2013 2014 2015 2016E 2017E

EBITDA margin ex SBS, Eurosport EBITDA margin SBS EBITDA margin Eurosport

10 January 2017


Manchester United Plc (MANU)



Revenue (£ m) 515.3 536.6 619.3 654.1 EBITDA 192 176 223 239 Depr. & amort. (98) (141) (127) (116) EBIT (£) 79 35 96 123 Net interest exp (18) (16) (16) (16) Associates - - - - Other adj. (12) 6 6 6 PBT (£) 49 25 86 113 Income taxes (12) (9) (30) (39) Profit after tax 36 16 56 73 Minorities -0 -0 -0 -0 Preferred dividends - - - - Associates & other 4 (0) 0 (0) Net profit (£) 41 16 56 73 Other NPAT adjustments (4) 0 0 0 Reported net income 36 16 56 73

Cash Flow 6/16A 6/17E 6/18E 6/19E

EBIT 79 35 96 123 Net interest (13) (16) (16) (16) Cash taxes paid (2) (1) (15) (23) Change in working capital 22 27 4 4 Other cash & non-cash items 100 141 127 116 Cash flow from operations 186 186 197 206 CAPEX (105) (142) (105) (89) Free cashflow to the firm 81 44 92 116 Acquisitions - - - - Divestments 0 0 0 0 Other investment/(outflows) (5) (5) (5) (5) Cash flow from investments (105) (142) (105) (89) Net share issue(/repurchase) 0 0 0 0 Dividends paid (20) (29) (29) (29) Issuance (retirement) of debt (0) (5) (9) (5) Other (79) 34 10 5 Cashflow from financing activities (100) 0 (29) (29) Effect of exchange rates 13 0 0 0 Changes in Net Cash/Debt (6) 44 63 88 Net debt at start 255 261 217 154 Change in net debt 6 (44) (63) (88) Net debt at end 261 217 154 67

Balance Sheet (£) 6/16A 6/17E 6/18E 6/19E

Assets Cash & cash equivalents 229 239 291 374 Account receivables 117 36 40 40 Inventory 0 0 0 0 Other current assets 20 25 26 27 Total current assets 367 299 357 441 Total fixed assets 246 241 236 232 Intangible assets and goodwill 421 421 421 421 Investment securities 13 13 13 13 Other assets 405 473 415 389 Total assets 1,452 1,448 1,444 1,497 Liabilities Accounts payables 129 87 88 74 Short-term debt 0 0 0 0 Other short term liabilities 275 221 227 231 Total current liabilities 404 308 314 304 Long-term debt 485 456 446 441 Other liabilities 105 238 212 236 Total liabilities 994 1,003 972 981

Shareholder equity 458 445 472 515 Minority interests 0 0 0 0 Total liabilities and equity 1,452 1,448 1,444 1,497 Net debt 261 217 154 67

Per share 6/16A 6/17E 6/18E 6/19E

No. of shares (wtd avg) 164 164 164 164 CS adj. EPS 0.25 0.10 0.34 0.45 Prev. EPS (£) - - - - Dividend (£) 0.12 0.18 0.18 0.00 Dividend payout ratio 49.62 185.30 52.91 0.00 Free cash flow per share 0.49 0.27 0.56 0.71

Earnings 6/16A 6/17E 6/18E 6/19E

Sales growth (%) 30.4 4.1 15.4 5.6 EBIT growth (%) 883.1 (55.3) 174.1 27.6 Net profit growth (%) 1092.5 (60.9) 250.2 31.1 EPS growth (%) 1091.1 (60.9) 250.2 31.1 EBITDA margin (%) 37.2 32.8 36.1 36.6 EBIT margin (%) 15.3 6.6 15.6 18.8 Pretax margin (%) 9.5 4.6 13.9 17.2 Net margin (%) 7.9 3.0 9.0 11.2

Valuation 6/16A 6/17E 6/18E 6/19E


Returns 6/16A 6/17E 6/18E 6/19E


Gearing 6/16A 6/17E 6/18E 6/19E



2016A 0.02 0.11 0.07 0.05 2017E -0.05 0.10 -0.01 0.06 2018E - - - -



Daily Jan08, 2016 - Jan06, 2017, 01/08/16 = US$16.08


10 January 2017


Key Charts

Figure 114: MANU revenue mix 2017E Figure 115: MANU operating expense mix 2017E


Figure 116: MANU segment revenue 2015-20E Figure 117: MANU segment revenue trend


Figure 118: MANU operating expense 2015-20E Figure 119: MANU Net Player Capex


Matchday18%

Media31%

Commercial51%

Employee Benefit Expenses

74%

Other Operating Expenses

26%

£91 £107 £95 £106 £108 £110

£108 £140 £167

£207 £222 £251

£197

£268 £275

£306 £324

£345

£395

£515 £537

£619 £654

£705

£-

£100

£200

£300

£400

£500

£600

£700

£800

£900

2015 2016 2017E 2018E 2019E 2020E

Rev

enu

e (£

m)

Matchday Media Commercial

23% 21% 18% 17% 17% 16%

27% 27% 31% 33% 34% 36%

50% 52% 51% 49% 50% 49%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2015 2016 2017E 2018E 2019E 2020E

Matchday Media Commercial

£203 £232

£265 £297 £310 £324

£72

£91

£96 £99

£105 £112

£275

£323

£361

£396 £415

£435

£-

£100

£200

£300

£400

£500

£600

2015 2016 2017E 2018E 2019E 2020E

Co

sts

(£m

)

Employee Benefit Expenses Other Operating Expenses

9.4%

7.4%

10.1%

15-20E

£97 £100

£137

£100

£84

£70

£-

£20

£40

£60

£80

£100

£120

£140

£160

2015 2016 2017E 2018E 2019E 2020E

Net

Pla

yer

Cap

ex (£

m)

10 January 2017


Comcast Corporation Inc. (CMCSA)



Revenue (US$ m) 75,563.0 80,347.2 82,083.0 87,953.7 EBITDA 25,104 26,496 27,397 29,399 Depr. & amort. (8,745) (9,646) (9,253) (9,591) EBIT (US$) 16,359 16,850 18,144 19,808 Net interest exp (2,702) (2,964) (3,000) (3,007) PBT (US$) 13,733 14,084 15,189 17,008 Income taxes (4,959) (5,282) (5,696) (6,378) Profit after tax 8,774 8,803 9,493 10,630 Other NPAT adjustments 353 67 0 (0)

Cash Flow 12/15A 12/16E 12/17E 12/18E

Cash flow from operations 18,708 19,404 19,236 20,816 CAPEX (9,347) (10,026) (9,234) (9,655) Free cashflow to the firm 9,361 9,379 10,002 11,161 Cash flow from investments (11,964) (10,494) (10,450) (10,805) Net share issue(/repurchase) (6,714) (5,000) (3,200) (3,300) Dividends paid (2,437) (2,684) (2,896) (3,171) Cashflow from financing activities (12,899) (16,302) (6,096) (6,471) Effect of exchange rates - - - - Changes in Net Cash/Debt (6,155) (7,511) 2,690 3,539 Net debt at start 44,171 50,326 57,837 55,146 Change in net debt 6,155 7,511 (2,690) (3,539) Net debt at end 50,326 57,837 55,146 51,607


Cash & cash equivalents 2,295 881 1,000 1,000 Account receivables 6,896 7,333 7,491 8,027 Other current assets 3,112 3,174 3,505 3,978 Total fixed assets 33,665 34,815 36,372 38,007 Investment securities - - - - Total assets 166,574 166,650 168,508 170,908 Total current liabilities 18,178 17,348 17,192 18,273 Shareholder equity 52,269 53,088 56,135 60,144 Total liabilities and equity 166,574 166,650 168,508 170,908 Net debt 50,326 57,837 55,146 51,607

Per share 12/15A 12/16E 12/17E 12/18E

No. of shares (wtd avg) 2,518 2,440 2,393 2,382 CS adj. EPS 3.25 3.46 3.82 4.40 Prev. EPS (US$) - - - - Dividend (US$) 1.00 1.10 1.21 1.33 Free cash flow per share 3.72 3.84 4.18 4.68

Earnings 12/15A 12/16E 12/17E 12/18E


Valuation 12/15A 12/16E 12/17E 12/18E

EV/EBITDA (x) 9.6 9.3 8.9 8.2 P/E (x) 21.7 20.3 18.4 16.0

Returns 12/15A 12/16E 12/17E 12/18E

ROIC (%) 0.1 0.1 0.1 0.1

Gearing 12/15A 12/16E 12/17E 12/18E

Net debt/equity (%) 91.2 102.7 92.3 80.8


Company Background

Comcast Corporation (Comcast) is a provider of video, high-speed Internet and phone services (cable services) to residential and business customers in the United States.



Our Blue Sky valuation is $86, which equates to 9.8x 2017 EV/EBITDA, and included a 100bp addition to 2016-20 Video ARPU growth.


Our Grey Sky valuation is $61, equating to 7.8x 2017 EV/EBITDA, and includes a 100bp reduction in 2016-20 Video ARPU growth.



Daily Jan08, 2016 - Jan06, 2017, 01/08/16 = US$54.665


10 January 2017


Key Charts

Figure 120: Comcast OCF mix 2016E Figure 121: NBCU OCF Mix 2016E


Figure 122: Cable Communications Revenue 2007-

17E Figure 123: NBCU revenue 2010-17E


Figure 124: Cable Video and HSD Net Adds 2003-

17E

Figure 125: Cable Video/Data Revenue Growth 2004-

17E


Cable Communications73%

NBCU 27%

Cable Networks47%

Broadcast TV17%


Theme Parks27%

0

10,000

20,000

30,000

40,000

50,000

60,000

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E

Video Data Voice Advertising Business Services Other

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

2010PF 2011 2012 2013 2014 2015 2016E 2017E

Cable Networks Broadcast TV Filmed Entertainment Theme Parks

(1,000)

(500)

0

500

1,000

1,500

2,000

2,500

3,000

2003 2004 2005 2006PF 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E

Video High Speed Data

(5%)

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

2004 2005 2006PF 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E

Video Data

10 January 2017


DISH Network Corporation (DISH)

Price (06 Jan 2017): US$61.36; Rating: NEUTRAL; Target Price: US$52.00; Analyst: Omar Sheikh


Revenue (US$ m) 15,068.9 15,176.6 15,155.1 15,201.7 EBITDA 2,971 3,116 3,031 2,917 Depr. & amort. (1,000) (996) (995) (994) EBIT (US$) 1,971 2,119 2,036 1,923 Net interest exp (474) 15 63 65 PBT (US$) 1,775 2,249 2,099 1,988 Income taxes (367) (824) (770) (729) Profit after tax 1,408 1,425 1,330 1,259 Other NPAT adjustments (433) (9) 0 0

Cash Flow 12/15A 12/16E 12/17E 12/18E

Cash flow from operations 2,436 2,749 2,779 2,545 CAPEX (762) (623) (554) (514) Free cashflow to the firm 1,674 2,126 2,225 2,030 Cash flow from investments (8,074) (1,654) (1,507) (1,416) Net share issue(/repurchase) 34 0 0 0 Dividends paid 0 0 0 0 Cashflow from financing activities (1,316) (0) 0 (0) Effect of exchange rates - - - - Changes in Net Cash/Debt (6,954) 1,095 1,272 1,128 Net debt at start 5,191 12,145 11,050 9,777 Change in net debt 6,954 (1,095) (1,272) (1,128) Net debt at end 12,145 11,050 9,777 8,649


Cash & cash equivalents 1,053 5,618 5,957 5,849 Account receivables 1,421 1,392 1,315 1,317 Other current assets 679 680 680 680 Total fixed assets 2,924 3,582 4,094 4,517 Investment securities - - - - Total assets 22,887 28,049 28,789 29,075 Total current liabilities 5,163 5,416 5,739 5,979 Shareholder equity 2,749 4,173 5,503 6,762 Total liabilities and equity 22,887 28,049 28,789 29,075 Net debt 12,145 11,050 9,777 8,649

Per share 12/15A 12/16E 12/17E 12/18E


Earnings 12/15A 12/16E 12/17E 12/18E

Sales growth (%) 2.9 0.7 (0.1) 0.3 EBIT growth (%) 8.0 7.5 (3.9) (5.5) Net profit growth (%) 24.9 19.7 (7.4) (5.4) EPS growth (%) 24.4 16.0 (10.3) (5.7) EBITDA margin (%) 19.7 20.5 20.0 19.2 EBIT margin (%) 13.1 14.0 13.4 12.7 Pretax margin (%) 11.8 14.8 13.9 13.1 Net margin (%) 7.8 9.3 8.6 8.1

Valuation 12/15A 12/16E 12/17E 12/18E

EV/EBITDA (x) 13.7 12.7 12.6 12.7 P/E (x) 24.2 20.8 23.2 24.6

Returns 12/15A 12/16E 12/17E 12/18E

ROIC (%) 0.1 0.1 0.1 0.1

Gearing 12/15A 12/16E 12/17E 12/18E

Net debt/equity (%) 400.6 247.9 169.0 122.8


Company Background

DISH Network Corp. provides satellite television in the United States. The company also offers Sling TV, an over-the-top service, and has large holdings of undeveloped wireless spectrum



Our Blue Sky valuation is $61, based on an additional 1% growth in Pay-TV ARPU and a 5.5x core DBS 2017 EV/EBITDA multiple.


Our Grey Sky valuation is $44, based on a 1% reduction in Pay-TV ARPU growth and a 3.5x core DBS 2017 EV/EBITDA multiple.



Daily Jan08, 2016 - Jan06, 2017, 01/08/16 = US$53.81


10 January 2017


Key Charts

Figure 126: DISH Network subscribers 2013-17E Figure 127: DISH Network net additions 2003-17E


Figure 128: DISH Network subscribers Figure 129: DISH Sling TV subscribers


Figure 130: DISH Network ARPU growth change

2003-17E

Figure 131: DISH Network gross adds/churn 2003-

17E


0

2

4

6

8

10

12

14

16

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E

DISH Network Subscribers

(1.000)

(0.500)

0.000

0.500

1.000

1.500

2.000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E

Net Additions

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Q4'14 Q1'15 Q2'15 Q3'15 Q4 15 Q1 16 Q2 16 Q3 16

Core DBS Sling

Q4'14 Q1'15 Q2'15 Q3'15 Q4 15 Q1 16 Q2 16 Q3 16

Subscribers

Core DBS 13,978 13,844 13,673 13,495 13,283 13,035 12,504 12,304

Sling 0 169 259 414 614 839 1,089 1,339

Total 13,978 14,013 13,932 13,909 13,897 13,874 13,593 13,643

Net adds

Core DBS (134) (171) (178) (212) (248) (531) (366)

Sling 169 90 155 200 225 250 250

Total 35 (81) (23) (12) (23) (281) (116)

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E

y/y % change in ARPU

1.40%

1.45%

1.50%

1.55%

1.60%

1.65%

1.70%

1.75%

1.80%

1.85%

1.90%

0.0m

0.5m

1.0m

1.5m

2.0m

2.5m

3.0m

3.5m

4.0m

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E

Annual gross Additions Monthly Churn

10 January 2017


Interpublic Group (IPG)



Revenue (US$ m) 7,613.8 7,841.7 8,115.7 8,432.0 EBITDA 1,029 1,103 1,166 1,236 Depr. & amort. (157) (162) (167) (174) EBIT (US$) 872 941 998 1,062 Net interest exp (63) (64) (62) (62) PBT (US$) 763 867 937 1,002 Income taxes (283) (321) (347) (371) Profit after tax 481 546 590 631 Other NPAT adjustments (47) 0 0 0

Cash Flow 12/15A 12/16E 12/17E 12/18E

Cash flow from operations 674 784 861 920 CAPEX (161) (166) (172) (178) Free cashflow to the firm 513 618 689 742 Cash flow from investments (203) (316) (322) (328) Net share issue(/repurchase) (285) (300) (300) (300) Dividends paid (196) (243) (258) (274) Cashflow from financing activities (502) (555) (588) (616) Effect of exchange rates (156) 0 0 0 Changes in Net Cash/Debt (187) (87) (49) (24) Net debt at start 66 253 340 389 Change in net debt 187 87 49 24 Net debt at end 253 340 389 413


Cash & cash equivalents 1,503 1,416 1,068 1,043 Account receivables 4,361 4,492 4,648 4,830 Other current assets 235 242 250 259 Total fixed assets 567 598 630 664 Investment securities - - - - Total assets 12,585 12,837 12,872 13,267 Total current liabilities 7,584 7,833 8,130 8,458 Shareholder equity 1,965 1,945 1,953 1,986 Total liabilities and equity 12,585 12,837 12,871 13,266 Net debt 253 340 389 413

Per share 12/15A 12/16E 12/17E 12/18E


Earnings 12/15A 12/16E 12/17E 12/18E


Valuation 12/15A 12/16E 12/17E 12/18E

EV/EBITDA (x) 9.4 8.8 8.4 7.9 P/E (x) 19.6 18.3 16.3 14.7

Returns 12/15A 12/16E 12/17E 12/18E

ROIC (%) 0.2 0.2 0.2 0.2

Gearing 12/15A 12/16E 12/17E 12/18E

Net debt/equity (%) 11.2 15.2 17.2 18.0

Quarterly EPS Q1 Q2 Q3 Q4 2015A -0.00 0.29 0.27 0.66 2016E 0.01 0.38 0.32 0.57 2017E - - - -

Company Background

A global advertising and marketing services company, specializes in consumer advertising, digital marketing, communications planning and media buying, public relations and specialized communications disciplines.



Our blue sky valuation is $31, which equates to 10.5x 2017 EV/EBITDA, and includes a 1.6% addition to 2016-20 organic revenue growth.


Our gray sky valuation is $21, which equates to 8.5x 2017 EV/EBITDA, and includes a 4% reduction to 2016-20 organic revenue growth.



Daily Jan08, 2016 - Jan06, 2017, 01/08/16 = US$22.05


10 January 2017


Key Charts

Figure 132: IPG revenue mix 2016E Figure 133: IPG operating expense mix 2016E


Figure 134: IPG segment revenue trend 2009-20E Figure 135: IPG revenue and margin trend 2009-20E


Figure 136: IPG uses of cash 2013-20E Figure 137: IPG operating leverage 2013-20E


IAN81%

CMG19%

Salary and related costs72%

Office and general expenses

28%

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Segment Revenue Trends 2009-20E, $m

IAN CMG

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Total Revenue Operating Margin (%)

34% 34% 41% 42% 40% 39% 39% 40%

115%

53%56% 49%

44% 40% 38% 37%

21%

16%

18% 24%24% 24%

19% 19%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

2013

2014

2015

2016

E

2017

E

2018

E

2019

E

2020

E

Dividends Share repurchases M&A

2.2x

1.8x1.7x

1.6x

1.3x 1.2x1.1x

1.1x

0.0x 0.1x

0.2x0.3x 0.3x 0.3x 0.3x 0.3x

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

2013

2014

2015

2016

E

2017

E

2018

E

2019

E

2020

E

Gross debt/EBITDA Net debt/EBITDA

10 January 2017


Omnicom Group Inc. (OMC)



Revenue (US$ m) 15,134.4 15,472.6 16,043.7 16,674.1 EBITDA 2,211 2,305 2,407 2,518 Depr. & amort. (291) (291) (298) (305) EBIT (US$) 1,920 2,014 2,109 2,213 Net interest exp (142) (168) (166) (169) PBT (US$) 1,787 1,855 1,951 2,053 Income taxes (584) (606) (637) (670) Profit after tax 1,203 1,249 1,314 1,382 Other NPAT adjustments 0 0 0 0

Cash Flow 12/15A 12/16E 12/17E 12/18E

Cash flow from operations 2,172 1,352 1,683 1,766 CAPEX (203) (207) (215) (223) Free cashflow to the firm 1,970 1,145 1,468 1,542 Cash flow from investments (264) (331) (343) (357) Net share issue(/repurchase) (728) (700) (700) (700) Dividends paid (497) (516) (524) (531) Cashflow from financing activities (1,400) (1,432) (1,580) (1,405) Effect of exchange rates (263) 0 0 0 Changes in Net Cash/Debt 247 (411) (241) 4 Net debt at start 2,423 2,176 2,588 2,828 Change in net debt (247) 411 241 (4) Net debt at end 2,176 2,588 2,828 2,824


Cash & cash equivalents 2,605 2,651 2,288 2,292 Account receivables 7,221 7,427 7,733 8,070 Other current assets 1,032 1,054 1,093 1,135 Total fixed assets 693 718 745 772 Investment securities - - - - Total assets 22,111 22,621 22,695 23,182 Total current liabilities 14,220 13,588 13,861 14,345 Shareholder equity 2,452 2,370 2,339 2,363 Total liabilities and equity 22,111 22,621 22,695 23,182 Net debt 2,176 2,588 2,828 2,824

Per share 12/15A 12/16E 12/17E 12/18E


Earnings 12/15A 12/16E 12/17E 12/18E

Sales growth (%) (1.2) 2.2 3.7 3.9 EBIT growth (%) (1.2) 4.9 4.7 4.9 Net profit growth (%) (1.0) 4.7 5.3 5.3 EPS growth (%) 3.1 7.1 9.1 9.2 EBITDA margin (%) 14.6 14.9 15.0 15.1 EBIT margin (%) 12.7 13.0 13.1 13.3 Pretax margin (%) 11.8 12.0 12.2 12.3 Net margin (%) 7.1 7.3 7.4 7.5

Valuation 12/15A 12/16E 12/17E 12/18E

EV/EBITDA (x) 10.1 9.9 9.6 9.2 P/E (x) 19.5 18.2 16.6 15.2

Returns 12/15A 12/16E 12/17E 12/18E

ROIC (%) 0.3 0.3 0.3 0.3

Gearing 12/15A 12/16E 12/17E 12/18E

Net debt/equity (%) 75.3 92.8 103.4 103.1


Company Background

Omnicom Group Inc., a holding company, provides advertising, marketing and corporate communications services. The Company’s branded networks and agencies operate in markets around the world.



Our blue sky valuation is $95, which equates to 10.1x 2017 EV/EBITDA, and includes a 1.5% addition to 2016-20 organic revenue growth.


Our grey sky valuation is $65, which equates to 8x 2017 EV/EBITDA, and includes a 3.5% reduction in 2016-20 organic revenue growth.



Daily Jan08, 2016 - Jan06, 2017, 01/08/16 = US$69.9


10 January 2017


Key Charts

Figure 138: OMC revenue mix 2016E Figure 139: OMC operating expense mix 2016E


Figure 140: OMC segment revenue trend 2009-20E

Figure 141: OMC revenue and margin trend 2009-

20E


Figure 142: OMC uses of cash 2008-20E Figure 143: OMC operating leverage 2013-20E


Advertising52%

CRM32%

Public relations9%

Specialty communications

7%

Salary and service costs86%

Occupancy and other costs9%

Office and General Exp3%

D&A2%

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

$20,000

2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Advertising CRM Public relations Specialty communications

10.5%

11.0%

11.5%

12.0%

12.5%

13.0%

13.5%

14.0%

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

$20,000

2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Total Revenue Operating Margin (%)

26%

46%32%

56%44% 43% 42% 41%

36%

84%

37%

61%

48% 45% 44% 42%6%

16%

8%

18%

23%

10% 9% 9%

0%

20%

40%

60%

80%

100%

120%

140%

160%

2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Dividends Share repurchases M&A

0.7x

1.1x1.0x

1.1x 1.2x 1.1x1.0x

1.0x

2.0x2.2x 2.2x 2.3x

2.1x2.0x 2.0x

1.9x

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Net Debt/EBITDA Gross Debt/EBITDA

10 January 2017


AMC Entertainment Holdings (AMC)



Revenue (US$ m) 2,946.9 3,094.5 3,290.6 3,456.3 EBITDA 536 552 617 668 Depr. & amort. (233) (252) (262) (274) EBIT (US$) 242 244 299 338 Net interest exp (106) (103) (100) (99) Associates 37 38 38 38 Other adj. (5) 10 5 5 PBT (US$) 169 189 242 281 Income taxes (60) (70) (94) (109) Profit after tax 109 119 148 172 Minorities - - - - Preferred dividends - - - - Associates & other 2 (12) (1) (1) Net profit (US$) 111 107 148 171 Other NPAT adjustments (7) 2 (1) (1) Reported net income 104 109 146 170

Cash Flow 12/15A 12/16E 12/17E 12/18E

EBIT 242 244 299 338 Net interest (106) (103) (100) (99) Cash taxes paid - - - - Change in working capital 28 (12) 15 12 Other cash & non-cash items 303 381 379 361 Cash flow from operations 468 510 593 612 CAPEX (333) (410) (410) (380) Free cashflow to the firm 134 100 183 231 Acquisitions (173) 0 0 0 Divestments - - - - Other investment/(outflows) (3) 0 0 0 Cash flow from investments (509) (410) (410) (380) Net share issue(/repurchase) 0 0 0 0 Dividends paid (79) (83) (87) (91) Issuance (retirement) of debt 0 0 0 0 Other (22) (0) 0 (0) Cashflow from financing activities (101) (83) (87) (91) Effect of exchange rates (0) 0 0 0 Changes in Net Cash/Debt (143) 17 97 140 Net debt at start 1,682 1,825 1,808 1,711 Change in net debt 143 (17) (97) (140) Net debt at end 1,825 1,808 1,711 1,571


Assets Cash & cash equivalents 211 139 228 359 Account receivables 106 108 114 120 Inventory 0 0 0 0 Other current assets 98 102 109 114 Total current assets 414 349 451 594 Total fixed assets 1,402 1,456 1,500 1,511 Intangible assets and goodwill 2,685 2,664 2,643 2,621 Investment securities - - - - Other assets 608 615 623 630 Total assets 5,110 5,084 5,217 5,357 Liabilities Accounts payables 313 300 317 331 Short-term debt 19 11 11 11 Other short term liabilities 380 399 425 446 Total current liabilities 712 710 752 788 Long-term debt 93 96 96 96 Other liabilities 2,765 2,701 2,721 2,736 Total liabilities 3,570 3,507 3,570 3,620

Shareholder equity 1,539 1,576 1,646 1,735 Minority interests - - - - Total liabilities and equity 5,109 5,083 5,215 5,355 Net debt 1,825 1,808 1,711 1,571

Per share 12/15A 12/16E 12/17E 12/18E


Earnings 12/15A 12/16E 12/17E 12/18E

Sales growth (%) 9.3 5.0 6.3 5.0 EBIT growth (%) 35.0 0.7 22.7 12.9 Net profit growth (%) 101.4 (3.1) 37.8 16.1 EPS growth (%) 100.7 (3.1) 37.8 16.1 EBITDA margin (%) 18.2 17.8 18.8 19.3 EBIT margin (%) 8.2 7.9 9.1 9.8 Pretax margin (%) 5.7 6.1 7.4 8.1 Net margin (%) 3.8 3.5 4.5 5.0

Valuation 12/15A 12/16E 12/17E 12/18E


Returns 12/15A 12/16E 12/17E 12/18E


Gearing 12/15A 12/16E 12/17E 12/18E



2015A -0.05 0.45 0.13 0.43 2016E 0.27 0.24 0.22 0.37 2017E - - - -



Daily Jan08, 2016 - Jan06, 2017, 01/08/16 = US$22.38


10 January 2017


IMAX Corp (IMAX)



Revenue (US$ m) 373.8 378.0 422.3 467.0 EBITDA 141 127 157 185 Depr. & amort. (26) (7) (8) (8) EBIT (US$) 88 67 114 150 Net interest exp (1) (0) 1 2 Associates - - - - Other adj. 0 0 0 0 PBT (US$) 87 67 116 152 Income taxes (20) (17) (29) (39) Profit after tax 67 50 87 112 Minorities (9) (12) (17) (23) Preferred dividends - - - - Associates & other (2) (3) (3) (3) Net profit (US$) 56 35 67 86 Other NPAT adjustments 0 0 0 0 Reported net income 56 35 67 86

Cash Flow 12/15A 12/16E 12/17E 12/18E

EBIT 88 67 114 150 Net interest (1) (0) 1 2 Cash taxes paid (17) (15) (18) (25) Change in working capital (37) 11 (18) (9) Other cash & non-cash items 50 63 54 57 Cash flow from operations 84 126 133 175 CAPEX (47) (83) (50) (63) Free cashflow to the firm 37 43 83 112 Acquisitions - - - - Divestments - - - - Other investment/(outflows) (7) (3) (1) (1) Cash flow from investments (79) (55) (41) (34) Net share issue(/repurchase) (9) 0 6 6 Dividends paid 0 0 0 0 Issuance (retirement) of debt 25 (2) 0 0 Other 164 (102) 0 0 Cashflow from financing activities 181 (103) 6 6 Effect of exchange rates 1 0 0 0 Changes in Net Cash/Debt 186 (32) 99 146 Net debt at start (102) (288) (256) (355) Change in net debt (186) 32 (99) (146) Net debt at end (288) (256) (355) (501)


Assets Cash & cash equivalents 317 284 383 529 Account receivables 215 203 222 234 Inventory 39 18 19 17 Other current assets 6 12 12 12 Total current assets 578 518 636 792 Total fixed assets 218 240 254 255 Intangible assets and goodwill 68 69 70 71 Investment securities - - - - Other assets 68 66 53 39 Total assets 932 893 1,012 1,157 Liabilities Accounts payables 23 20 21 22 Short-term debt 29 28 28 28 Other short term liabilities (0) 0 0 0 Total current liabilities 53 48 49 50 Long-term debt 0 0 0 0 Other liabilities 201 188 188 188 Total liabilities 253 235 237 238

Shareholder equity 625 598 716 860 Minority interests 53 59 59 59 Total liabilities and equity 932 893 1,012 1,157 Net debt (288) (256) (355) (501)

Per share 12/15A 12/16E 12/17E 12/18E


Earnings 12/15A 12/16E 12/17E 12/18E


Valuation 12/15A 12/16E 12/17E 12/18E


Returns 12/15A 12/16E 12/17E 12/18E


Gearing 12/15A 12/16E 12/17E 12/18E

Net debt/equity (%) (42.5) (39.0) (45.8) (54.5) Net Debt to EBITDA (x) Net

Cash Net

Cash Net

Cash Net

Cash Interest coverage ratio (X) 126.7 339.4 (104.1) (71.8)


2015A 0.07 0.40 0.17 0.39 2016E 0.22 0.18 0.12 0.35 2017E - - - -



Daily Jan08, 2016 - Jan06, 2017, 01/08/16 = US$31.55


10 January 2017


Cinemark Holdings, Inc (CNK)



Revenue (US$ m) 2,852.6 2,915.2 3,112.5 3,296.1 EBITDA 695 702 766 814 Depr. & amort. (189) (201) (215) (227) EBIT (US$) 440 442 487 522 Net interest exp (109) (104) (99) (94) Associates 22 20 27 28 Other adj. 12 0 0 0 PBT (US$) 366 359 415 456 Income taxes (129) (125) (150) (165) Profit after tax 237 233 265 291 Minorities (2) (2) (2) (2) Preferred dividends - - - - Associates & other (8) (9) (5) (5) Net profit (US$) 227 222 258 283 Other NPAT adjustments (11) (13) (6) (6) Reported net income 216 209 252 277

Cash Flow 12/15A 12/16E 12/17E 12/18E

EBIT 440 442 487 522 Net interest (113) (107) (102) (98) Cash taxes paid (129) (125) (150) (165) Change in working capital 25 24 17 21 Other cash & non-cash items 233 239 267 282 Cash flow from operations 456 472 518 562 CAPEX (322) (306) (311) (297) Free cashflow to the firm 134 166 207 265 Acquisitions (3) (10) (23) (23) Divestments 10 0 0 0 Other investment/(outflows) (4) 0 0 0 Cash flow from investments (328) (316) (334) (319) Net share issue(/repurchase) 0 0 0 0 Dividends paid (116) (125) (131) (138) Issuance (retirement) of debt (8) 18 (7) (7) Other (26) (18) 7 7 Cashflow from financing activities (150) (125) (131) (138) Effect of exchange rates (27) 0 0 0 Changes in Net Cash/Debt (49) 32 53 105 Net debt at start 1,371 1,421 1,389 1,335 Change in net debt 49 (32) (53) (105) Net debt at end 1,421 1,389 1,335 1,230


Assets Cash & cash equivalents 589 582 595 659 Account receivables 74 62 67 71 Inventory 16 14 18 16 Other current assets 36 37 38 38 Total current assets 715 695 717 784 Total fixed assets 1,505 1,616 1,730 1,817 Intangible assets and goodwill 1,587 1,582 1,577 1,572 Investment securities - - - - Other assets 319 317 315 313 Total assets 4,126 4,210 4,339 4,485 Liabilities Accounts payables 109 113 121 129 Short-term debt 0 0 0 0 Other short term liabilities 331 335 350 363 Total current liabilities 440 448 471 491 Long-term debt 1,773 1,789 1,782 1,775 Other liabilities 803 763 741 719 Total liabilities 3,016 2,999 2,993 2,985


Per share 12/15A 12/16E 12/17E 12/18E


Earnings 12/15A 12/16E 12/17E 12/18E

Sales growth (%) 8.6 2.2 6.8 5.9 EBIT growth (%) 14.2 0.5 10.1 7.3 Net profit growth (%) 10.3 (2.1) 16.1 9.9 EPS growth (%) 9.9 (2.3) 16.1 9.9 EBITDA margin (%) 24.4 24.1 24.6 24.7 EBIT margin (%) 15.4 15.2 15.6 15.8 Pretax margin (%) 12.8 12.3 13.3 13.8 Net margin (%) 8.0 7.6 8.3 8.6

Valuation 12/15A 12/16E 12/17E 12/18E


Returns 12/15A 12/16E 12/17E 12/18E


Gearing 12/15A 12/16E 12/17E 12/18E



2015A 0.36 0.66 0.40 0.54 2016E 0.57 0.46 0.45 0.44 2017E - - - -



Daily Jan08, 2016 - Jan06, 2017, 01/08/16 = US$31.03


10 January 2017


Regal Entertainment Group (RGC)



Revenue (US$ m) 3,127.3 3,201.9 3,363.0 3,435.0 EBITDA 608 599 654 682 Depr. & amort. (217) (234) (261) (264) EBIT (US$) 339 333 352 375 Net interest exp (130) (128) (128) (128) PBT (US$) 279 268 294 319 Income taxes (100) (107) (118) (128) Profit after tax 179 161 176 191 Other NPAT adjustments (15) (11) 0 0

Cash Flow 12/15A 12/16E 12/17E 12/18E

Cash flow from operations 434 367 420 438 CAPEX (174) (135) (151) (155) Free cashflow to the firm 261 232 268 284 Cash flow from investments (183) (135) (180) (183) Net share issue(/repurchase) 0 0 0 0 Dividends paid (139) (138) (145) (152) Cashflow from financing activities (130) (138) (145) (152) Effect of exchange rates - - - - Changes in Net Cash/Debt 121 94 95 103 Net debt at start 2,213 2,092 1,998 1,903 Change in net debt (121) (94) (95) (103) Net debt at end 2,092 1,998 1,903 1,800


Cash & cash equivalents 220 313 395 488 Account receivables 150 141 148 151 Other current assets 47 47 48 49 Total fixed assets 1,404 1,319 1,213 1,107 Investment securities - - - - Total assets 2,602 2,584 2,599 2,609 Total current liabilities 551 531 555 566 Shareholder equity (878) (858) (818) (770) Total liabilities and equity 2,602 2,584 2,599 2,609 Net debt 2,092 1,998 1,903 1,800

Per share 12/15A 12/16E 12/17E 12/18E


Earnings 12/15A 12/16E 12/17E 12/18E


Valuation 12/15A 12/16E 12/17E 12/18E

EV/EBITDA (x) 9.1 9.0 8.1 7.6 P/E (x) 20.2 21.2 19.3 17.8

Returns 12/15A 12/16E 12/17E 12/18E

ROIC (%) 0.2 0.2 0.2 0.2

Gearing 12/15A 12/16E 12/17E 12/18E

Net debt/equity (%) (238.4) (233.0) (232.8) (233.7)


Company Background

Regal Entertainment is the largest movie exhibitor in the United States, with the most geographically diverse theatre circuit across the country.



Our Blue Sky valuation is $28 (100bp addition in Attendance per Avg. Screen growth, 9.2x 2017 EV/EBITDA).


Our Grey Sky valuation is $16 (100bp reduction in Attendance per Avg. Screen growth, 7.2x 2017 EV/EBITDA).



Daily Jan08, 2016 - Jan06, 2017, 01/08/16 = US$17.52


10 January 2017


National CineMedia (NCMI)



Revenue (US$ m) 446.5 470.9 524.1 539.7 EBITDA 232 248 278 277 Depr. & amort. (32) (32) (33) (32) EBIT (US$) 182 195 228 227 Net interest exp (65) (66) (65) (65) Associates - - - - Other adj. (36) 0 0 0 PBT (US$) 81 130 163 162 Income taxes (18) (17) (21) (21) Profit after tax 64 113 141 141 Minorities (48) (81) (100) (99) Preferred dividends - - - - Associates & other 15 0 0 0 Net profit (US$) 30 31 42 41 Other NPAT adjustments (15) 0 0 0 Reported net income 15 31 42 41

Cash Flow 12/15A 12/16E 12/17E 12/18E

EBIT 182 195 228 227 Net interest (65) (66) (65) (65) Cash taxes paid - - - - Change in working capital (37) 2 3 (4) Other cash & non-cash items 25 25 26 26 Cash flow from operations 105 157 192 184 CAPEX (13) (15) (16) (16) Free cashflow to the firm 93 142 176 168 Acquisitions - - - - Divestments 0 0 0 0 Other investment/(outflows) 14 4 4 4 Cash flow from investments 1 (10) (12) (12) Net share issue(/repurchase) 0 0 0 0 Dividends paid (52) (52) (52) (52) Issuance (retirement) of debt 44 (27) (18) (10) Other (122) (53) (92) (99) Cashflow from financing activities (130) (132) (163) (162) Effect of exchange rates 0 0 0 0 Changes in Net Cash/Debt (24) 14 18 10 Net debt at start 857 880 866 848 Change in net debt 24 (14) (18) (10) Net debt at end 880 866 848 838


Assets Cash & cash equivalents 32 20 20 20 Account receivables 149 142 158 163 Inventory 0 0 0 0 Other current assets 23 30 32 33 Total current assets 204 192 210 215 Total fixed assets 25 32 40 49 Intangible assets and goodwill 567 539 512 484 Investment securities - - - - Other assets 278 274 270 266 Total assets 1,074 1,038 1,033 1,015 Liabilities Accounts payables 15 15 17 18 Short-term debt 0 0 0 0 Other short term liabilities 110 112 131 132 Total current liabilities 125 127 148 150 Long-term debt 925 899 881 871 Other liabilities 195 190 190 190 Total liabilities 1,245 1,217 1,220 1,211

Shareholder equity (407) (413) (409) (406) Minority interests 235 235 222 209 Total liabilities and equity 1,074 1,038 1,033 1,015 Net debt 880 866 848 838

Per share 12/15A 12/16E 12/17E 12/18E


Earnings 12/15A 12/16E 12/17E 12/18E

Sales growth (%) 13.3 5.5 11.3 3.0 EBIT growth (%) 14.5 7.2 16.7 (0.6) Net profit growth (%) 43.1 3.7 33.0 (0.7) EPS growth (%) 41.7 3.7 33.0 (0.7) EBITDA margin (%) 52.0 52.6 53.1 51.2 EBIT margin (%) 40.8 41.5 43.5 42.0 Pretax margin (%) 18.3 27.5 31.0 30.0 Net margin (%) 6.8 6.7 7.9 7.7

Valuation 12/15A 12/16E 12/17E 12/18E

EV/Sales (x) 4.39 4.13 3.68 3.56 EV/EBITDA (x) 8.5 7.9 6.9 6.9 EV/EBIT (x) 10.8 10.0 8.5 8.5 P/E (x) 29.2 28.1 21.2 21.3 Price to book (x) (2.2) (2.1) (2.2) (2.2) Asset turnover 0.4 0.5 0.5 0.5

Returns 12/15A 12/16E 12/17E 12/18E

ROE stated-return on (%) (3.8) (7.6) (10.1) (10.2) ROIC (%) 0.2 0.2 0.3 0.3 Interest burden (%) 0.45 0.66 0.71 0.71 Tax rate (%) 21.8 13.0 13.0 13.0 Financial leverage (%) (2.27) (2.18) (2.15) (2.15)

Gearing 12/15A 12/16E 12/17E 12/18E

Net debt/equity (%) (512.8) (485.0) (452.1) (426.4) Net Debt to EBITDA (x) 3.8 3.5 3.0 3.0 Interest coverage ratio (X) 2.8 3.0 3.5 3.5


2015A 0.01 0.17 0.13 0.20 2016E -0.05 0.13 0.17 0.27 2017E - - - -



Daily Jan08, 2016 - Jan06, 2017, 01/08/16 = US$14.8


10 January 2017


Appendix

Figure 144: DIS 12m forward EV/EBITDA Figure 145: DIS 12m forward P/E


Figure 146: FOXA 12m forward EV/EBITDA Figure 147: FOXA 12m forward P/E


Figure 148: CBS 12m forward EV/EBITDA Figure 149: CBS 12m forward P/E


0.00x

2.00x

4.00x

6.00x

8.00x

10.00x

12.00x

14.00x

1/8/2007 1/8/2008 1/8/2009 1/8/2010 1/8/2011 1/8/2012 1/8/2013 1/8/2014 1/8/2015 1/8/2016

DIS 12m fwd EV/EBITDA

0.00x

5.00x

10.00x

15.00x

20.00x

25.00x

1/8/2007 1/8/2008 1/8/2009 1/8/2010 1/8/2011 1/8/2012 1/8/2013 1/8/2014 1/8/2015 1/8/2016

DIS 12m fwd PE

0x

2x

4x

6x

8x

10x

12x

14x

1/8/2007 1/8/2008 1/8/2009 1/8/2010 1/8/2011 1/8/2012 1/8/2013 1/8/2014 1/8/2015 1/8/2016

FOXA 12m fwd EV/EBITDA

0x

5x

10x

15x

20x

25x

1/8/2007 1/8/2008 1/8/2009 1/8/2010 1/8/2011 1/8/2012 1/8/2013 1/8/2014 1/8/2015 1/8/2016

FOXA 12m fwd PE

0.00x

2.00x

4.00x

6.00x

8.00x

10.00x

12.00x

14.00x

1/8/2007 1/8/2008 1/8/2009 1/8/2010 1/8/2011 1/8/2012 1/8/2013 1/8/2014 1/8/2015 1/8/2016

CBS 12m fwd EV/EBITDA

0.00x

2.00x

4.00x

6.00x

8.00x

10.00x

12.00x

14.00x

16.00x

18.00x

20.00x

1/8/2007 1/8/2008 1/8/2009 1/8/2010 1/8/2011 1/8/2012 1/8/2013 1/8/2014 1/8/2015 1/8/2016

CBS 12m fwd PE

10 January 2017


Figure 150: TWX 12m forward EV/EBITDA Figure 151: TWX 12m forward P/E


Figure 152: VIAB 12m forward EV/EBITDA Figure 153: VIAB 12m forward P/E


Figure 154: DISCA 12m forward EV/EBITDA Figure 155: DISCA 12m forward P/E


0.00x

2.00x

4.00x

6.00x

8.00x

10.00x

12.00x

14.00x

16.00x

18.00x

1/8/2007 1/8/2008 1/8/2009 1/8/2010 1/8/2011 1/8/2012 1/8/2013 1/8/2014 1/8/2015 1/8/2016

TWX 12m fwd EV/EBITDA

0.00x

5.00x

10.00x

15.00x

20.00x

25.00x

1/8/2007 1/8/2008 1/8/2009 1/8/2010 1/8/2011 1/8/2012 1/8/2013 1/8/2014 1/8/2015 1/8/2016

TWX 12m fwd PE

0x

2x

4x

6x

8x

10x

12x

1/8/2007 1/8/2008 1/8/2009 1/8/2010 1/8/2011 1/8/2012 1/8/2013 1/8/2014 1/8/2015 1/8/2016

VIAB 12m fwd EV/EBITDA

0x

2x

4x

6x

8x

10x

12x

14x

16x

18x

20x

1/8/2007 1/8/2008 1/8/2009 1/8/2010 1/8/2011 1/8/2012 1/8/2013 1/8/2014 1/8/2015 1/8/2016

VIAB 12m fwd PE

0.00x

2.00x

4.00x

6.00x

8.00x

10.00x

12.00x

14.00x

6/1/2009 6/1/2010 6/1/2011 6/1/2012 6/1/2013 6/1/2014 6/1/2015 6/1/2016

DISCA 12m fwd EV/EBITDA

0.00x

5.00x

10.00x

15.00x

20.00x

25.00x

6/1/2009 6/1/2010 6/1/2011 6/1/2012 6/1/2013 6/1/2014 6/1/2015 6/1/2016

DISCA 12m fwd PE

10 January 2017


Figure 156: MANU 12m forward EV/EBITDA Figure 157: MANU 12m forward P/E


Figure 158: CMCSA 12m forward EV/EBITDA Figure 159: CMCSA 12m forward P/E


Figure 160: DISH 12m forward EV/EBITDA Figure 161: DISH 12m forward P/E


0.00x

5.00x

10.00x

15.00x

20.00x

25.00x

10/1/2012 4/1/2013 10/1/2013 4/1/2014 10/1/2014 4/1/2015 10/1/2015 4/1/2016 10/1/2016

MANU 12m fwd EV/EBITDA

0.00x

20.00x

40.00x

60.00x

80.00x

100.00x

120.00x

10/1/2012 4/1/2013 10/1/2013 4/1/2014 10/1/2014 4/1/2015 10/1/2015 4/1/2016 10/1/2016

MANU 12m fwd PE

0.00x

1.00x

2.00x

3.00x

4.00x

5.00x

6.00x

7.00x

8.00x

9.00x

10.00x

1/8/2007 1/8/2008 1/8/2009 1/8/2010 1/8/2011 1/8/2012 1/8/2013 1/8/2014 1/8/2015 1/8/2016

CMCSA 12m fwd EV/EBITDA

0.00x

5.00x

10.00x

15.00x

20.00x

25.00x

30.00x

35.00x

1/8/2007 1/8/2008 1/8/2009 1/8/2010 1/8/2011 1/8/2012 1/8/2013 1/8/2014 1/8/2015 1/8/2016

CMCSA 12m fwd PE

0.00x

2.00x

4.00x

6.00x

8.00x

10.00x

12.00x

14.00x

16.00x

18.00x

1/8/2007 1/8/2008 1/8/2009 1/8/2010 1/8/2011 1/8/2012 1/8/2013 1/8/2014 1/8/2015 1/8/2016

DISH 12m fwd EV/EBITDA

0.00x

5.00x

10.00x

15.00x

20.00x

25.00x

30.00x

35.00x

40.00x

45.00x

50.00x

1/8/2007 1/8/2008 1/8/2009 1/8/2010 1/8/2011 1/8/2012 1/8/2013 1/8/2014 1/8/2015 1/8/2016

DISH 12m fwd PE

10 January 2017


Figure 162: IPG 12m forward EV/EBITDA Figure 163: IPG 12m forward P/E

Note: EV calculation uses LTM net debt to adjust for seasonality.

Source: Thomson Reuters


Figure 164: OMC 12m forward EV/EBITDA Figure 165: OMC 12m forward P/E

Note: EV calculation uses LTM net debt to adjust for seasonality.



Figure 166: DIS Quarterly Share Price Performance

Figure 167: FOXA Quarterly Share Price

Performance


6.00x

6.50x

7.00x

7.50x

8.00x

8.50x

9.00x

9.50x

10.00x

1/6/2014 5/6/2014 9/6/2014 1/6/2015 5/6/2015 9/6/2015 1/6/2016 5/6/2016 9/6/2016 1/6/2017

IPG 12m fwd EV/EBITDA

10.00x

11.00x

12.00x

13.00x

14.00x

15.00x

16.00x

17.00x

18.00x

19.00x

20.00x

1/6/2014 5/6/2014 9/6/2014 1/6/2015 5/6/2015 9/6/2015 1/6/2016 5/6/2016 9/6/2016 1/6/2017

IPG 12m fwd PE

6.00x

6.50x

7.00x

7.50x

8.00x

8.50x

9.00x

9.50x

10.00x

10.50x

1/6/2014 5/6/2014 9/6/2014 1/6/2015 5/6/2015 9/6/2015 1/6/2016 5/6/2016 9/6/2016 1/6/2017

OMC 12m fwd EV/EBITDA

10.00x

11.00x

12.00x

13.00x

14.00x

15.00x

16.00x

17.00x

18.00x

19.00x

1/6/2014 5/6/2014 9/6/2014 1/6/2015 5/6/2015 9/6/2015 1/6/2016 5/6/2016 9/6/2016 1/6/2017

OMC 12m fwd PE

-30%

-20%

-10%

0%

10%

20%

30%

40%

Q1

2011

Q2

2011

Q3

2011

Q4

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DIS S&P 500

-20%

-15%

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-5%

0%

5%

10%

15%

20%

25%

Q1

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Q1

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FOXA S&P 500

10 January 2017


Figure 168: CBS Quarterly Share Price Performance Figure 169: TWX Quarterly Share Price Performance


Figure 170: VIAB Quarterly Share Price Performance

Figure 171: DISCA Quarterly Share Price

Performance


Figure 172: MANU Quarterly Share Price

Performance

Figure 173: CMCSA Quarterly Share Price

Performance


-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

Q1

2011

Q2

2011

Q3

2011

Q4

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Q1

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CBS S&P 500

-30%

-20%

-10%

0%

10%

20%

30%

Q1

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Q2

2011

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2011

Q4

2011

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Q1

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TWX S&P 500

-40%

-30%

-20%

-10%

0%

10%

20%

30%

Q1

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Q2

2011

Q3

2011

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2011

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2014

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Q1

2017

VIAB S&P 500

-30%

-20%

-10%

0%

10%

20%

30%

Q1

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Q2

2011

Q3

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DISCA S&P 500

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

Q1

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MANU S&P 500

-30%

-20%

-10%

0%

10%

20%

30%

Q1

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2011

Q3

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CMCSA S&P 500

10 January 2017


Figure 174: CHTR Quarterly Share Price

Performance Figure 175: DISH Quarterly Share Price Performance


Figure 176: IPG Quarterly Share Price Performance Figure 177: OMC Quarterly Share Price Performance


Figure 178: S&P 500 Media Index constituents and

estimated weighting

Source: Bloomberg, Credit Suisse estimates

-30%

-20%

-10%

0%

10%

20%

30%

40%

Q1

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Q2

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CHTR S&P 500

-30%

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0%

10%

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30%

Q1

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DISH S&P 500

-50%

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0%

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Q1

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IPG S&P 500

-30%

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0%

10%

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30%

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OMC S&P 500

S&P 500 Media Constituents Weighting

Ominicom Group 3.1%

Walt Disney 26.8%

Charter Communications Inc 12.5%

Discovery Communications (Series C) 1.0%

Comcast Corp 25.9%

Time Warner Inc 11.3%

Discovery Communications (Series A) 0.6%

Viacom Inc 2.0%

Twenty-First Century Fox (Class B) 3.6%

News Corp (Class B) 0.4%

TEGNA Inc 0.7%

CBS Corp 3.9%

Interpublic 1.5%

Scripps Netwroks Interactive 1.1%

Twenty-First Century Fox (Class A) 4.8%

News Corp (Class A) 0.7%

10 January 2017


Global CMO survey

Snapshot of our survey's respondents

Figure 179: Our survey's respondents were skewed

toward Marketing Directors, but 14% were CMOs

Figure 180: Total marketing budgets of our

respondents cover the spectrum of large to small

Question: "What is your job title?"


Question: "In 2016, what was the approximate size of your company's total marketing budget?"


Figure 181: All major industry categories are

covered in our survey…

Figure 182: …and all major territories are

represented

Question: "In which broad industry group does your company operate?"


Question: "In which territory(-ies) do you spend your marketing budget?"


Marketing Director39%

Marketing Manager17%

Chief Marketing Officer14%

Marketing Executive12%

Brand Manager

5%

Other 13%

$50m-$250m55%

Over $500m32%

$251m-$500m13%

1%

1%

1%

1%

1%

2%

4%

5%

6%

6%

7%

11%

11%

14%

14%

15%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

Soft Drinks

Clothing

Alcohol

Household Equipment

Miscellaneous Servides

Media

Auto

Travel

Personal Care

Communications

Finance

Food

Other

Retail

Pharma

Technology

0% 10% 20% 30% 40% 50% 60% 70% 80%

IndonesiaSouth Korea

JapanOther Asia

RussiaArgentinaAustralia

BrazilChinaIndia

Other Latin AmericaGermany

ItalySpain

FranceOther Europe

MexicoCanada

UKUSA

10 January 2017


Advertiser budget intentions

Figure 183: Our respondents say 51% of their total

marketing budget is spent on promotional spend…

Figure 184: …and a small net balance (11%) expect

to shift toward advertising over the next two years


Note: Responses not weighted for the size of respondents’ advertising or marketing budget.


Question: "Directionally over the next two years, how do you expect your marketing mix to change between advertising (i.e. media spend) and promotion/below the line?"



Figure 185: A strong net balance (47%) expect to

increase total marketing budgets in 2017 by an

aggregate 4%-5%

Figure 186: An equally strong net balance (46%)

plan to increase advertising budgets in 2017 by an

aggregate 4%-5%




Question: "Looking at your advertising budget in 2017 vs 2016, by approximately how much do you expect it to grow/decline?"



Advertising49%


8%

26%

42%

19%

5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%





2%

6%

8%

20%

12%

33%

19%

0%

5%

10%

15%

20%

25%

30%

35%


Decline by 5%-10%



Grow by 5% -to10%

Grow more than10%

1%

6%

11%

19%

14%

31%

19%

0%

5%

10%

15%

20%

25%

30%

35%


Decline by 5%-10%



Grow by 5%-10%


10 January 2017


Figure 187: Strong net balances (~80%) of

respondents expect to grow online spend; large net

balances (~31%) expect to shrink print spend

Figure 188: Linear TV: small net balance (14%)

expects to reduce advertising spending over the

next two years







Figure 189: Online video: strong net balance (81%)

expects to increase advertising spending over the

next two years

Figure 190: Social media: strong net balance (80%)


next two years







-33%

-29%

-19%

-14%

-9%

-7%

56%

68%

80%

81%

-40% -20% 0% 20% 40% 60% 80% 100%

Magazines

Newspaper

Outdoor

Linear TV

Cinema

Radio

Other online

Search

Social Media

Online video

Net Balance

7%

22%

36%

9%

6%

19%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Decreasesignificantly

Decrease slightly Stay the same Increase slightly Increasesignificantly

Do not use

Linear TV

0%4%

9%

66%

19%

2%

0%

10%

20%

30%

40%

50%

60%

70%



Do not use

Online video

1%4%

11%

53%

32%

0%0%

10%

20%

30%

40%

50%

60%



Do not use

Social Media

10 January 2017


Figure 191: Other online: strong net balance (56%)


next two years

Figure 192: Newspapers: large net balance (29%)

expects to decrease advertising spending over the

next two years







Figure 193: Magazines: large net balance (33%)


next two years

Figure 194: Outdoor: small net balance (19%)


next two years; 31% do not use the medium at all







0%

5%

29%

48%

13%

5%

0%

10%

20%

30%

40%

50%

60%



Do not use

Other online

18% 18%

28%

2%4%

31%

0%

5%

10%

15%

20%

25%

30%

35%



Do not use

Newspaper

18%

25%

33%

7%

2%

15%

0%

5%

10%

15%

20%

25%

30%

35%



Do not use

Magazines

7%

24%

27%

7%

5%

31%

0%

5%

10%

15%

20%

25%

30%

35%



Do not use

Outdoor

10 January 2017


Figure 195: Cinema: small net balance (9%) expects

to decrease advertising spending over the next two

years; ~half (44%) do not use the medium at all

Figure 196: Radio: small net balance (7%) expects

to decrease advertising spending over the next two

years; 27% do not use the medium at all







Figure 197: Search: large net balance (68%) expects

to increase advertising spending over the next two

years




8%

13%

24%

7%5%

44%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%



Do not use

Cinema

6%

15%

38%

9%

5%

27%

0%

5%

10%

15%

20%

25%

30%

35%

40%



Do not use

Radio

0%2%

25%

55%

15%

2%

0%

10%

20%

30%

40%

50%

60%



Do not use

Search

10 January 2017


Figure 198: Majority (79%) of respondents cited

"Return on investment" as a driver of advertising

spend

Figure 199: Overwhelming majority (75%) of

respondents expect to use sales growth as their

benchmark for advertising spend




Question: "Directionally over the next two years, how would you expect your advertising budget to grow?"



The challenge from technology companies…

Figure 200: The majority (61%) of respondents

allocate up to 10% of marketing budgets to

technology/strategic marketing consultancies…

Figure 201: …and a net balance of 35% expect to

increase the proportion over the next two years

Question: "In 2017, approximately what proportion of your total marketing budget do you expect to allocate to technology companies/strategic consultancies (e.g. IBM, Accenture, Deloitte, Adobe, Oracle?"



Question: "Directionally over the next two years, how do you expect the proportion of your total marketing budget allocated to technology companies/strategic consultancies to change?"



79%

73%

60%

42%

27%

2%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Return onInvestment



Other

29%

14%

32%

13%

1%2%

8%

0%

5%

10%

15%

20%

25%

30%

35%

In line with salesgrowth

Faster than salesgrowth

Slower thansales growth

In line withinflation (CPI)

Above inflation(CPI)

Below inflation(CPI)

Do not expect itto grow

0%-10%61%

11%-20%28%

21%-30%6%

31%-40%4%

41%-50%1%

2%

7%

46%

38%

7%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Decrease significantly Decrease slightly Stay the same Increase slightly Increase significantly

10 January 2017


…and from in-house marketing departments

Figure 202: Our respondents all reported sizable in-

house marketing departments…

Figure 203: …and a strong net balance (36%) expect

to grow in-house headcount over the next two years

Question: "How many people are currently employed in your in-house marketing department?"



Question: "Directionally over the next two years, do you expect the number of people employed in your in-house marketing department to grow or decline?"



Planned fee/commission spend on agencies

Figure 204: A strong net balance (69%) of

respondents expect to increase fees/commissions

on "pure" digital agencies in 2017

Figure 205: A small net balance (4%) of respondents

expect to increase fees/commissions on full service

advertising agencies in 2017







21%

15%

20%

40%

4%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0-10 11-20 20-50 >50 Can't discuss

0%

8%

44%41%

4% 4%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Decline significantly Decline slightly Stay the same Grow slightly Grow significantly Not disclosed

-6%

0%

2%

4%

4%

8%

21%

40%

69%

-10% 0% 10% 20% 30% 40% 50% 60% 70% 80%


Other (please specify):



PR

Direct Marketing




Net Balance

4%

20%

40%

24%

4%

9%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%



Do not use


10 January 2017




on "pure" creative agencies in 2017


expect to decrease fees/commissions on media

agencies (planning/buying) in 2017







Figure 208: A very strong net balance (69%) of


on "pure" digital agencies in 2017



on market research/data analytics agencies in 2017







2%

15%

40%

28%

11%

4%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%



Do not use


5%

25%

44%

19%

5% 4%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%



Do not use


0%4%

22%

49%

24%

1%

0%

10%

20%

30%

40%

50%

60%



Do not use


0%

11%

38%

41%

9%

1%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%



Do not use


10 January 2017



expect to increase fees/commissions on PR

agencies in 2017


expect to increase fees/commissions on healthcare

marketing agencies in 2017








expect to increase fees/commissions on direct

marketing agencies in 2017




6%

14%

54%

21%

2% 2%

0%

10%

20%

30%

40%

50%

60%



Do not use

PR

5%7%

28%

11%

4%

46%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%



Do not use


8%

16%

35%

31%

2%

7%

0%

5%

10%

15%

20%

25%

30%

35%

40%



Do not use

Direct Marketing

10 January 2017



respondents say they are satisfied with current

agency compensation…

Figure 214: Respondents are most satisfied with

compensation at "pure" digital agencies (60% net

balance) and least satisfied with healthcare (16%)

Question: "How satisfied would you say your firm is with your current agency compensation agreements, both in relation to the overall fees/commissions paid and the structure of the compensation?"






Figure 215: Full service agencies: respondents'

satisfaction is high (32% net balance)

Figure 216: Creative agencies: respondents'

satisfaction is below average (26% net balance)







17%

40%

18%

5%

20%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Very Satisfied Somewhat satisfied Not very satisfied Not at all satisfied Don't know / not sure

16%

20%

26%

27%

32%

41%

52%

60%

0% 10% 20% 30% 40% 50% 60% 70%




PR


Direct Marketing



Net Balance

18%

41%

25%

2%

14%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%



19%

39%

27%

5%

11%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%



10 January 2017


Figure 217: Media agencies: respondents'

satisfaction is relatively low (20% net balance)

Figure 218: Digital agencies: respondents'

satisfaction is very high (60% net balance)







Figure 219: Market research agencies: respondents'

satisfaction is very high (52% net balance)

Figure 220: PR agencies: respondents' satisfaction

is slightly below average (27% net balance)







14%

41%

29%

6%

9%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%



24%

53%

13%

4%

7%

0%

10%

20%

30%

40%

50%

60%



27%

45%

14%

6%8%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%



14%

39%

18%

8%

21%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%


PR

10 January 2017


Figure 221: Healthcare agencies: Majority (55%) of

respondents answered "Don't know/not sure"

Figure 222: Direct marketing agencies: respondents'

satisfaction is high (41% net balance)







Figure 223: A strong net balance of respondents

(20%) say agency profit margins are too high

Figure 224: …respondents highlighted creative

agencies the most, healthcare marketing the least







8%

22%

9%

5%

55%

0%

10%

20%

30%

40%

50%

60%



14%

40%

11%

2%

33%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%


Direct Marketing

25%

53%

5%

17%

0%

10%

20%

30%

40%

50%

60%

Too high About right Too low Not my concern

9%

9%

15%

18%

19%

24%

29%

32%

0% 5% 10% 15% 20% 25% 30% 35%


Direct marketing



PR




10 January 2017


Figure 225: A big portion (47%) of respondents

said, when changing agency compensation, their

primary motivation was to improve agency

performance

Question: "If you plan to change, or have recently changed, your agency compensation agreements, what will be/were your motivations?"



Performance-based incentives

Figure 226: The majority of our respondents (58%)

do not currently use performance-based incentives

Figure 227: A minority (8%-16%) would consider

using performance-based incentives in future

Question: "Does your firm currently use performance-based incentives in the compensation structure for your agency partners?"






44%

47%

5% 5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

To reduce cost To improve agencyperformance

To simplify administration Other

13%16%

58%

13%

0%

10%

20%

30%

40%

50%

60%

70%

All agency partners One or more agency partners No No, but may consider it in thefuture

8%

11%

11%

12%

13%

14%

15%

16%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18%






PR

Direct Marketing


10 January 2017


Figure 228: Performance-based incentives are most

prevalent in media agencies (48% of respondents)

and least prevalent in healthcare (5%)

Figure 229: "Earn-back" incentives are the most

commonly used type (25% of respondents)




Question: "If your firm currently uses performance-based incentives to compensate some or all of your agency partners, which of the following best describes your most prevalent practice in structuring the incentives?"

Definitions: "Risk-Reward": the agency puts some of its established fee or commission at risk (for sub-par performance) in exchange for an upside incentive above and beyond its established fee or commission for meeting or exceeding defined performance goals

"Upside": the incentive is a bonus the agency can earn above and beyond its established fee or commission for meeting or exceeding defined performance goals. None of the agency's fees or commissions is put at risk.

"Earn-back": the incentive is structured so some of the agency's established fee/commission is at risk, and the agency can only earn it back by meeting defined performance goals.



Figure 230: Sales goals are the most prevalent

criteria (46%) in performance-based incentives

Question: "If your firm uses, or intends to use, performance-based incentives, which of the criteria listed do you use, or intend to use, to evaluate agency performance?"



5%

15%

19%

25%

38%

41%

48%

48%

0% 10% 20% 30% 40% 50% 60%


PR


Direct Marketing





8%

13%

16%

25%

38%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Use incentives, butcannot disclose

"Risk-Reward" "Upside" "Earn-Back" Do not use

0%

5%

14%

16%

27%

27%

32%

34%

35%

46%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Other

Can not discuss

Profit goals

Agency performance reviews

Brand Perceptions

Do not use

Brand/ad awareness

Market Share goals

Media performance goals

Sales goals

10 January 2017


Digital advertising

Figure 231: An overwhelming majority (86%) of

respondents expect to increase spending on

programmatic platforms

Figure 232: 80% of respondents had some concerns

about programmatic platforms, with nearly half

(49%) highlighting lack of transparency

Question: "Directionally over the next two years how do you expect the proportion of your digital/online marketing budget spend using programmatic platforms to change?"



Question: "What concerns (if any) do you have about programmatic buying being performed by an agency?"



Figure 233: The vast majority of respondents

(82%-92%) highlighted concerns about viewability,

ad blocking, and ad fraud

Figure 234: Two-thirds (68%) of respondents said

concerns over viewability would impact their

spending either "significantly" or "modestly"

Question: "Looking at your digital/online advertising budget over the next two years, please stipulate your level of concern about the following issues and please highlight whether they may negatively impact the amount you will spend by choosing one of the following options:

High level of concern, may negatively impact the amount we spend to a significant extent

Slight concern, may negatively impact the amount we spend to a modest extent

Have concerns, but will not impact our spending decisions

We are not concerned about this issue"










0%

4%

9%

52%

34%

0% 1%

0%

10%

20%

30%

40%

50%

60%



Don't know Can't discuss

49%

38%

32%

25%

20%

16%

2%

0%

10%

20%

30%

40%

50%

60%

Lack oftransparency

Conflict ofinterest

Highmargins/fees

Ownership ofdata

No concerns Fraud Other

88%

92%

82%

76%

78%

80%

82%

84%

86%

88%

90%

92%

94%

Rising use of ad blocking software Viewability of ads Ad Fraud

19%

49%

24%

8%

0%

10%

20%

30%

40%

50%

60%

High Concern Slight concern Have concerns Not concerned

Viewability of ads

10 January 2017


Figure 235: 60% of respondents said concerns over

ad blocking software would impact their spending

either "significantly" or "modestly"

Figure 236: Less than half (47%) of respondents

said concerns over ad fraud would impact their

spending either "significantly" or "modestly"















Figure 237: A surprisingly small net balance (16%)

highlighted they believe social media delivers a

higher ROI than traditional media

Figure 238: A small net balance (11%) highlighted

they believe social media delivers a lower ROI than

other digital media

Question: "Looking at the marketing dollars your firm spent on social media campaigns (e.g. on Facebook, Instagram, Twitter, Snapchat etc) over the last two years, do you believe the ROI (return on investment) was higher or lower than the ROI on traditional media campaigns (e.g. on TV, radio, outdoor, newspapers etc)?"



Question: "Looking at the marketing dollars your firm spent on social media campaigns (e.g. on Facebook, Instagram, Twitter, Snapchat etc) over the last two years, do you believe the ROI (return on investment) was higher or lower than the ROI on other digital media campaigns (e.g. on digital display, online video etc)?"



22%

38%

28%

12%

0%

5%

10%

15%

20%

25%

30%

35%

40%


Rising use of ad blocking software

25%

22%

35%

18%

0%

5%

10%

15%

20%

25%

30%

35%

40%


Ad Fraud

32%

20%

48%

0%

10%

20%

30%

40%

50%

60%

ROI lower ROI the same ROI higher

Social media vs. Traditional media

40%

31%29%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

ROI lower ROI the same ROI higher

Social media vs. Other digital

10 January 2017


Healthcare marketing


healthcare marketing respondents expect to

increase their focus on medical professionals

Figure 240: A similar net balance (25%) of

healthcare marketing respondents expect to

increase their focus on consumers

Question: "Directionally over the next two years, how do you expect the percentage of your advertising budget used to target medical professionals (i.e. physicians/nurses) vs consumers (i.e. patients) to change?" [Limited to healthcare marketing professionals only]



Question: "Directionally over the next two years, how do you expect the percentage of your advertising budget used to target medical professionals (i.e. physicians/nurses) vs consumers (i.e. patients) to change?" [Limited to healthcare marketing professionals only]



Agency transparency and rebates

Figure 241: A small net balance (21%) said they are

satisfied with the current level of transparency and

disclosure of rebates

Figure 242: A large portion (46%) of respondents

cited "general trust in agency" as a concern

regarding the issues of rebates and transparency

Question: "How satisfied would you say your firm is with your current agency's level of transparency and disclosure of rebates in the US?"



Question: "What concerns do you have regarding the issuance of rebates and agency transparency in US, if any? Please select all that apply.



0%

17%

42%

25%

17%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Decrease Significantly Decrease slightly Stay the same Increase slightly Increase significantly

Medical professionals

8%

17%

25%

33%

17%

0%

5%

10%

15%

20%

25%

30%

35%

Decrease Significantly Decrease slightly Stay the same Increase slightly Increase significantly

Consumers

11%

27%

12%

5%

45%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%


11%

30%

35%

40%

46%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Other (please specify)

Service/consulting agreements functioning ass a kickback

Unkown inventory markups from agency trading desks

Agency kickbacks (keeping portions of the rebate)

General trust in agency

10 January 2017


US-only data

Figure 243: A strong net balance (57%) expect to

increase total marketing budgets in 2017 by an

aggregate 4%-5%

Figure 244: An equally strong net balance (54%)

plan to increase advertising budgets in 2017 by an

aggregate 4%-5%




Question: "Looking at your advertising budget in 2017 vs 2016, by approximately how much do you expect it to grow/decline?



Figure 245: Our respondents say 51% of their total

marketing budget is spent on promotional spend…

Figure 246: …and a small net balance (8%) expect to

shift toward advertising over the next two years




Question: "Directionally over the next two years, how do you expect your marketing mix to change between advertising (i.e. media spend) and promotion/below the line?"



0%

6%5%

21%

16%

38%

14%

0%

5%

10%

15%

20%

25%

30%

35%

40%


Decline by 5%-10%



Grow by 5%-10%


0%

3%

10%

21%

17%

32%

17%

0%

5%

10%

15%

20%

25%

30%

35%


Decline by 5%-10%



Grow by 5%-10%


Advertising49%


8%

24%

44%

19%

5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%





10 January 2017


Figure 247: Strong net balances (~74%) of

respondents expect to grow online spend; large net

balances (~32%) expect to shrink print spend

Figure 248: Majority (87%) of respondents cited

"Return on investment" as a driver of advertising

spend







-33%

-30%

-17%

-17%

-10%

-5%

59%

67%

75%

81%

-40% -20% 0% 20% 40% 60% 80% 100%

Magazines

Newspaper

Linear TV

Outdoor

Radio

Cinema

Other online

Search

Online video

Social Media87%

71%

62%

51%

32%

3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Return onInvestment



Other

10 January 2017


Americas/United States Entertainment

The Walt Disney Company (DIS) Rating OUTPERFORM Price (06-Jan-17, US$) 108.98 Target price (12-mth, US$) 125.00 52-week price range 108.98 - 88.85 Market cap (US$ m) 173,437.42 *Stock ratings are relative to the coverage universe in each

analyst's or each team's respective sector.

¹Target price is for 12 months.

Research Analysts

Omar Sheikh

212 325 6818

[email protected]


212 538 8442

[email protected]

Boyao Sun

212 325 3494

[email protected]

Hard to justify a NFLX deal up here

■ Our view on the NFLX debate: In this report, we analyse the strategic and

financial rationale of a potential acquisition by DIS of NFLX. We conclude that

(i) with industry trends improving, the strategic pressure to acquire a

distributor near term is moderating, and (ii) the dilution to EPS/FCF and to

returns at the current share price would be prohibitive. However, we also

point out the T/TWX merger; continued growth from SVOD aggregators; and

sports rights renewals in 2021/22 mean maintaining DIS current structure

long term is not risk-free either, suggesting this debate is unlikely to go away.

We reduce our 2017/18 EPS forecasts by 1% to $5.94/$6.76 (previously

$6.00/$6.79), driven by Consumer Products, but reiterate our OP rating.

■ Industry trends improving: DIS' organic strategy of distributing its cable

networks via "virtual" MVPDs and slowing down the pace at which it licenses

content to SVOD are now playing out. We see these having a positive impact

on ESPN, and overall industry, subscribers, over the next 2-3 years which

should reduce the strategic pressure to consider a NFLX deal.

■ NFLX would dilute EPS/FCF and CFROI®: We calculate that a 70% debt

financed transaction at $160 per NFLX share would materially dilute DIS

EPS/FCF (-11%/-10%), and be modestly dilutive to CFROI®. At the $70bn

price tag, DIS would need to deliver around $2bn of annual pre-tax synergies

from the transaction to cover its cost of capital. While (i) gaining close to 90m

global customer relationships years ahead of an organic strategy; (ii) having

more monetisation options for sports rights; and (iii) removing the SVOD risk

to its core cable networks are all reasons to consider a deal, it is hard to see

them delivering the synergies that would be required to justify the cost.

■ Valuation: Disney trades at a c20% premium to peers on '17 EV/EBITDA

(11.2x vs 9.2x), but at a c50% premium on '17 P/E (18.4x vs 12.6x). At our

$125 target, DIS would trade at 12.5x '17 EV/EBITDA, 21.1x '17 P/E.



Daily Jan08, 2016 - Jan06, 2017, 01/08/16 = US$99.25


Financial and valuation metrics

Year 10/16A 10/17E 10/18E 10/19E EPS (CS adj.) (US$) 5.72 5.94 6.76 7.59 Prev. EPS (US$) 5.75 6.00 6.79 7.58 P/E (x) 19.1 18.4 16.1 14.4 P/E rel. (%) 97.7 95.3 93.4 93.0 Revenue (US$ m) 55,632.0 58,728.6 62,203.7 64,211.5 EBITDA (US$ m) 16,885.0 17,078.4 18,437.6 19,527.7 OCFPS (US$) 8.06 7.81 9.06 10.09 P/OCF (x) 11.5 13.9 12.0 10.8 EV/EBITDA (current) 11.2 11.2 10.6 10.2 Net debt (US$ m) 15,560 18,601 22,248 25,715 ROIC (%) 15.03 15.13 16.64 17.89

Number of shares (m) 1,591.46 IC (current, US$ m) 62,883.00 BV/share (Next Qtr., US$) - EV/IC (x) - Net debt (Next Qtr., US$ m) - Dividend (current, US$) 3.12 Net debt/tot eq (Next Qtr.,%) - Dividend yield (%) - Source: Company data, Thomson Reuters, Credit Suisse estimates

10 January 2017


"Virtual" MVPDs positive for ESPN subscribers

As we highlight in our 2017 Outlook report (see our industry report above), we regard the

launch of "virtual" MVPDs including DirecTV NOW and Hulu as structurally positive for

owners of cable networks. This is because vMVPDs offer the convenience of on-demand

access to content on multiple devices – so compete on the new "basis of competition" in

the industry (see Figure 249) – but also buy content in a bundle, i.e. in the form of a linear

network rather than an individual series. In other words, DirecTV NOW and Hulu look well-

placed to challenge the value proposition of SVOD aggregators including Netflix and

Amazon and should slow down the rate of decline in pay TV subscribers over the coming

quarters.




Figure 250: The "virtual" MVPD strategy disrupts the disruptors, and media

companies' content licensing can further dampen the threat from SVOD



The rate of decline in ESPN subscribers has already improved over the last year (see

Figure 251), from a 3% pa decline in 2015 to a 2% pa decline in 2016, according to data

Access

Access to TV

Volume

Number of Networks

Functionality

DVR/HD

Convenience

On-Demand

Price?


Incumbents

Innovators

Innovation Barriers

Time Period

Duration




1941-1980 1980-1995 1995-2010 2010-2025?


2025-?

Performance

Time20172007 2027





“Virtual” MVPDs

10 January 2017


from Nielsen and SNL Kagan. This improvement reflects the stabilisation in overall

industry subscribers including the first vMVPD (Sling), as we show in Figure 254.

We argue that if the DirecTV NOW and Hulu services (and others to follow) gain traction

with consumers, this should have a positive impact on ESPN subscribers – if consumers

looking for a more convenient content bundle decide to switch from a traditional distributor

to a vMVPD (instead of to an SVOD provider), they will continue to pay for ESPN as part

of the new service. We show our industry forecasts for traditional MVPDs, "virtual" MVPDs

and SVOD providers in Figure 257 and Figure 258 below.

Figure 251: ESPN subscriber declines moderated in

2016, to 2% pa, from 3% in 2015

Figure 252: …and have now been falling for 6

straight years, according to Kagan data

Source: SNL Kagan, Nielsen (reported in DIS 10K) Source: SNL Kagan



Figure 254: Subscriber declines in 2016 stabilize

after including growth at Sling TV


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ESPN y/y subscriber growth (SNL Kagan) ESPN y/y subscriber growth (Nielsen)

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10 January 2017


Figure 255: Seasonal losses (ex-Sling) have hit their

highest level since recession

Figure 256: Cable is continuing to take share from

DBS & Telco


Figure 257: 2016 video bundle subscriber mix

Source: Company data, SNL Kagan, Credit Suisse estimates

(626)

(371)

(99)(242)

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LTM Net Additions/(Losses) - Cable LTM Net Additions/(Losses) - DBS

LTM Net Additions/(Losses) - Telco

MVPDs (98m)

Netflix (47.6m)

Hulu SVOD (12m)

Amazon Prime

PS Vue

(0.2m)

DirecTV

Now

(0.1m)

HBO Now

(1.1m)

Sling TV

(1.4m)CBS All-

Access

(1.3m)

Starz

(1.4m)

Showtime

OTT (1.3m)

10 January 2017


Figure 258: 2020 video bundle subscriber mix

Source: Company data, SNL Kagan, Credit Suisse estimates

Pressure point coming for sports rights in 2021/22

While we are positive on the medium term trends for ESPN's subscribers, we also argue

the business will face heightened competition for sports rights, that ultimately underpin its

cashflow, over the next few years. This competition will come from established vertically

integrated competitors – Comcast and (assuming the merger is approved) AT&T/Time

Warner – as well as from potential new entrants, including Amazon. Two of the big three

domestic sports rights contracts (NFL and NBA) are due to be renewed in less than five

years.

MVPDs (92m)

Netflix (65m)Hulu SVOD (40m)

Hulu live streaming (10m)

Amazon Prime

Starz (5.9m)

Showtime OTT (5.8m)

HBO NOW (5.6m)

CBS All-Access (4.8m)

Sling TV (3m)

DirecTV Now

(5.5m)

PS Vue

(0.5m)

10 January 2017


Figure 259: Vertical integration is gaining traction in the media/cable industries

Source: Credit Suisse Research

For example, ESPN's rights contract with the NFL for Monday Night Football is a critical

driver of the network's pricing power, in our view. If Comcast or AT&T choose to "upgrade"

their existing rights packages (Sunday night and Sunday afternoon out-of-market games

respectively), ESPN's ability to grow affiliate rates in future would be diminished. In

addition, although it is unclear how serious Amazon might be in its desire to build a sports

business, it could in theory consider adding premium sports to its existing strategy of

acquiring original drama/series content for Amazon Prime Video.

While Comcast, AT&T and Amazon can generate value from sports content by bundling it

with their broadband, wireless or online retail services, Disney cannot. We argue Disney

will face a host of vertically integrated competitors for sports rights within the next five

years, which we think increases pressure on the company to build its own downstream

distribution options. The purpose would be to internalise the distribution margin, potentially

access incremental customers and mine data for targeted advertising.

The company is of course already pursuing this strategy, with the acquisition of a stake in

BAMTech and the selective launch of DisneyLife. It is possible this will be sufficient to

build a downstream distribution business over time but we would argue that, because of

content licensing restrictions on ESPN's marquee content, the size of the BAMTech

business is unlikely to grow beyond a relatively small niche. The lessons ESPN can learn

from that platform on how to monetise content direct to consumer are therefore likely to be

limited, in our view.

Would it make sense for Disney to acquire Netflix?

Competition for sports rights from vertically integrated competitors and limited scope for an

organic strategy to achieve scale quickly are two reasons why we think Disney may have

to consider either accelerating its organic investment or acquiring a downstream

distribution business.

HBO

TNT

TBS

CNN

Cartoon

Network

Adult Swim

HGTV

Food Network

Fox Sports

Fox News

FX

FXX

National Geographic

Fox

(Broadcast)

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Central

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Investigation

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Network

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(Broadcast)

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Fox UniversalWarner

Bros.Sony Amazon DWA Param’t

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NetflixComcast

HuluDisney MLB NFL NBA

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Disney XD

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(Broadcast)

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WarnerViacom Fox Scripps CBSHulu

Set top box Smart TV Games console Tablet Smartphone

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(Broadcast)

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Comcast Charter AT&T Verizon HuluNetflix Amazon

Apple YouTube

DISH Cox Cab’vision

Orig

inat

ors

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rega

tors

Dis

trib

utor

sD

evic

es

10 January 2017


This has led many investors to ask us whether the right strategic response might be for

Disney to acquire Netflix. The rationale would be:

■ To acquire close to 90m direct customer relationships in 190 countries to whom sports

and other content packages could be sold. Scale could be achieved years ahead of

any organic strategy.

■ To acquire access to a deep dataset of consumers' interactions with video content

which could be used by Disney upstream content businesses to more closely tailor

content to consumers' desires, and for the purposes of targeted advertising.

We outline the financial implications of the transaction in the tables below. To summarise:

■ The acquisition cost, assuming a 20% control premium, would be $70bn.

■ Assuming 70% debt financing, the transaction would be materially dilutive to EPS and

FCF (-11%/-10% in 2017), assuming no synergies.

■ The transaction would be only slightly dilutive to DIS' 2017 CFROI®, which would

decline from 13.4% to 13.1%, again assuming no synergies.

■ The transaction would earn a post-tax return on capital below DIS' cost of capital

unless it can find a way to generate synergies of around $2bn pa over time.

■ Synergies could be achieved from (i) creating direct-to-consumer sports packages for

NFLX customers, within the confines of rights agreements with existing distributors; (ii)

expanding the existing relationship between DIS-owned studios and NFLX to develop

original content for NFLX to distribute on an SVOD basis globally; (iii) use NFLX's data

to analyse customer viewing habits, which can be fed into the content origination

process; (iv) use NFLX's platform to create targeted advertising products.

For us, the decision for Disney is clear on a purely financial basis – it would be very hard

to justify – but more finely balanced strategically.

On the one hand, the existing strategy – distribute via vMVPDs and invest organically in

BAMTech/DisneyLife are in the early stages of their development and could yield benefits

over time. Moreover, ESPN's long history with sports rights owners and skills in monetising

sports content confer substantial advantages over existing competitors and potential new

entrants. And the huge absolute cost and dilution to near term earnings and cash flow

make it very hard to justify from a financial perspective.

However, against this, the status quo is not risk-free. We would highlight:

■ As we show in Figure 260, if SVOD aggregators are left unchecked their "performance"

(as defined by Clayton Christensen in The Innovator's Dilemma) is improving at a pace

which is likely to make them increasingly disruptive to the traditional ecosystem.

■ The industry's current strategy (slowly reducing the volume of content licenced to

SVOD aggregators, launching "virtual" MVPDs) may not be successful, because SVOD

aggregators could respond by accelerating their investment in original content,

including in sports rights. By acquiring the leading SVOD player, Disney would remove

that strategic risk.

We believe Disney will most likely follow the more conservative organic path and choose

not to acquire Netflix. However, we also think the long term strategic merits and the risks

from the status quo suggest the debate is unlikely to go away.

10 January 2017


Figure 260: If left unchecked, SVOD services are improving their "performance"

at a pace which will increase their disruptive threat to the traditional ecosystem



Figure 261: SVOD aggregators can respond themselves by accelerating their

acquisition exclusive content, possibly including sports rights



Performance

Time20172007 2027




Performance

Time20172007 2027




SVOD – disruptors acquire exclusive rights e.g. orgiinaldramas, or perhaps sports

“Virtual” MVPDs

10 January 2017


Figure 262: DIS+NFLX proforma EPS accretion/dilution & return analysis

Note: Assumes DIS pays $160 per share for NFLX (20% premium); 70% debt financing at 2% after tax of debt; $500m of synergies by 2019; 3.3x proforma net leverage in 2017


Figure 263: Acquiring NFLX would dilute DIS' CFROI® by 2% in 2017E

Note: Forecasts based on consensus estimates

Source: Credit Suisse HOLT®, Thomson Reuters, Credit Suisse Research

Earnings to re-accelerate in 2018

Disney's management highlighted on the Q3 earnings conference call that EPS growth

would be "more robust" in 2018, after "modest" growth in 2017. We continue to forecast

14% growth in 2018, and 6% growth in 2017.

We found management's comments encouraging, but would highlight two risks to earnings

growth in 2017, namely:

■ Consumer Products is likely to remain soft ahead of the release of Cars 3 in June. This

suggests a recovery in growth in this division (14% of operating income) will be back-

half loaded.

2016E 2017E 2018E 2019E 2016E 2017E 2018E 2019E 2016E 2017E 2018E 2019E

DIS (CSe) NFLX (Cse, adj.): DIS+NFLX:

Segment EBITDA $17,753 $18,402 $19,743 $20,817 Segment EBITDA $599 $1,266 $2,012 $3,036 Segment EBITDA $18,352 $19,668 $21,756 $23,854

EBITDA synergies $0 $0 $200 $500

- Corporate ($648) ($680) ($714) ($750) - Corporate $0 $0 $0 $0 - Corporate ($648) ($680) ($714) ($750)

- Other ($97) $0 $0 $0 - Other ($181) ($175) ($203) ($232) - Other ($97) $0 $0 $0

EBITDA $17,008 $17,722 $19,029 $20,067 EBITDA $419 $1,091 $1,809 $2,804 EBITDA $17,607 $18,987 $21,241 $23,603

- Depreciation ($2,341) ($2,424) ($2,505) ($2,590) - Depreciation ($58) ($63) ($70) ($79) - Depreciation ($2,399) ($2,487) ($2,575) ($2,668)

- Amortization ($212) ($227) ($231) ($236) - Amortization $0 $0 $0 $0 - Amortization ($212) ($227) ($231) ($236)

Depreciation & Amortization ($2,553) ($2,651) ($2,736) ($2,826) Depreciation & Amortization ($58) ($63) ($70) ($79) Depreciation & Amortization ($2,611) ($2,713) ($2,806) ($2,905)

EBIT $14,456 $15,071 $16,293 $17,241 EBIT $541 $1,203 $1,942 $2,957 EBIT $14,997 $16,274 $18,435 $20,699

Equity Income of Investees $945 $1,016 $1,070 $1,124 Equity Income of Investees $0 $0 $0 $0 Equity Income of Investees $945 $1,016 $1,070 $1,124

EBIT incl. Equity Income $15,401 $16,087 $17,363 $18,365 EBIT incl. Equity Income $541 $1,203 $1,942 $2,957 EBIT incl. Equity Income $15,942 $17,290 $19,505 $21,822

- Impairment and Restructuring Charges ($117) $0 $0 $0 - Impairment and Restructuring Charges $0 $0 $0 $0 - Impairment and Restructuring Charges ($117) $0 $0 $0

- Interest Expense, Net ($315) ($482) ($494) ($510) - Interest Expense, Net ($93) ($174) ($176) ($116) - Interest Expense, Net ($1,377) ($1,625) ($1,639) ($1,595)

Other, Net $0 $0 $0 $0 Other, Net $0 $0 $0 $0 Other, Net $0 $0 $0 $0

Income Before Taxes $14,969 $15,605 $16,868 $17,855 Income Before Taxes $448 $1,028 $1,766 $2,841 Income Before Taxes $14,448 $15,665 $17,866 $20,227

Income Tax (Expense) Benefit ($5,112) ($5,330) ($5,761) ($6,098) Income Tax (Expense) Benefit ($145) ($401) ($689) ($1,108) Income Tax (Expense) Benefit ($4,927) ($5,397) ($6,184) ($7,043)

Tax rate 34% 34% 34% 34% Tax rate 32% 39% 39% 39% Tax rate 34% 34% 35% 35%

Net Income from Cont'd Operations $9,856 $10,276 $11,107 $11,757 Net Income from Cont'd Operations $303 $627 $1,077 $1,733 Net Income from Cont'd Operations $9,521 $10,268 $11,682 $13,184

Net Inc. Attrib. to Noncontrolling Interests ($402) ($414) ($426) ($439) Net Inc. Attrib. to Noncontrolling Interests $0 $0 $0 $0 Net Inc. Attrib. to Noncontrolling Interests ($402) ($414) ($426) ($439)

Net Inc. Attrib. to DIS Stockholders $9,454 $9,862 $10,681 $11,317 Net Inc. Attrib. to DIS Stockholders $303 $627 $1,077 $1,733 Net Inc. Attrib. to DIS Stockholders $9,119 $9,854 $11,255 $12,745

One Time Items ($14) $0 $0 $0 One Time Items $0 $0 $0 $0 One Time Items ($14) $0 $0 $0

Adj Net Income $9,440 $9,862 $10,681 $11,317 Adj Net Income $303 $627 $1,077 $1,733 Adj Net Income $9,104 $9,854 $11,255 $12,745

Diluted Shares Outstanding 1,627 1,574 1,503 1,424 Diluted Shares Outstanding 439 452 465 479 Diluted Shares Outstanding 1,825 1,772 1,701 1,621

Diluted Adj EPS $5.80 $6.27 $7.10 $7.95 Diluted Adj EPS $0.69 $1.39 $2.32 $3.62 Diluted Adj EPS $4.99 $5.56 $6.62 $7.86

EPS accretion/dilution -14% -11% -7% -1%

Incremental net income (336) (8) 575 1,428

Investment (EV @ $160 per share) 69,896 69,896 69,896 69,896

Return on investment -0.5% 0.0% 0.8% 2.0%

12.7

13.7 13.713.1 13.4

7.5

9.1

6.7

5.6

6.9

12.6

13.6 13.312.7

13.1

0.0

2.0

4.0

6.0

8.0

10.0

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16.0

2013 2014 2015 2016E 2017E

DIS NFLX DIS + NFLX Proforma

10 January 2017


Figure 264: We expect Consumer Products' top line

growth to rebound in 2017… Figure 265: …driven by Licensing & Publishing


■ ESPN's affiliate agreement with Altice (which owns Suddenlink and Cablevision) is due

for renewal in calendar Q1 2017. Altice is regarded in the industry as an aggressive

negotiator with suppliers on price – this suggests there may be some risk to affiliate

revenue growth forecasts in 2017. We currently expect 3% affiliate revenue growth at

ESPN, including 5% growth in per subscriber rates.

Figure 266: DIS Cable Network forecasts 2011-2020E


Figure 267: We expect Cable Networks' revenues to grow 3% in 2017, but EBIT

to decline 1%, or by $80m, because of the close to $600m step-up in NBA costs


-6%

9%

12%

6%

10%

13%14%

-1%

9% 9%

5% 5%

15%13%

17%

7%9%

11% 12%

-7%

5%4% 4% 4%

-10%

-5%

0%

5%

10%

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20%

2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E

Licensing & publishing Retail & other

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E

Licensing & publishing Retail & other

2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E

Affiliate $8,750 $9,240 $9,816 $10,310 $11,539 $11,683 $12,011 $12,586 $13,189 $13,821

Advertising $3,522 $3,785 $3,963 $4,128 $4,334 $4,451 $4,565 $4,784 $5,014 $5,255

Other $605 $596 $674 $672 $708 $498 $766 $789 $812 $837

Total revenue $12,877 $13,621 $14,453 $15,110 $16,581 $16,632 $17,341 $18,159 $19,015 $19,912

Programming $5,199 $5,558 $6,026 $6,404 $7,272 $7,352 $8,201 $8,458 $8,866 $9,294

SG&A $2,885 $2,874 $3,023 $2,983 $3,258 $3,159 $3,317 $3,483 $3,657 $3,840

EBITDA $4,793 $5,190 $5,405 $5,723 $6,052 $6,121 $5,823 $6,218 $6,492 $6,778

Depreciation $134 $141 $139 $145 $150 $147 $148 $150 $151 $153

Amortisation $4 $9 $7 $6 $11 $9 $9 $9 $9 $9

EBIT $4,655 $5,040 $5,259 $5,572 $5,891 $5,965 $5,666 $6,059 $6,331 $6,616

Margin % 36% 37% 36% 37% 36% 36% 33% 33% 33% 33%

Equity Income $578 $664 $788 $895 $896 $783 $1,002 $1,052 $1,105 $1,160

Reported EBIT $5,233 $5,704 $6,047 $6,467 $6,787 $6,748 $6,668 $7,111 $7,436 $7,776

2016 2017E 2018E 2019E 2020E 2016 2017E 2018E 2019E 2020E

Affiliate 1% 3% 5% 5% 5% $144 $327 $576 $603 $632

Advertising 3% 3% 5% 5% 5% $117 $114 $219 $230 $241

Other -30% 54% 3% 3% 3% ($210) $268 $23 $24 $24

Total revenue 0% 4% 5% 5% 5% $51 $709 $817 $856 $897

Programming 1% 12% 3% 5% 5% $80 $849 $257 $408 $428

SG&A -3% 5% 5% 5% 5% ($99) $158 $166 $174 $183

EBITDA 1% -5% 7% 4% 4% $70 ($298) $394 $274 $286

Depreciation -2% 1% 1% 1% 1% ($3) $1 $1 $1 $2

Amortisation -14% 1% 1% 1% 1% ($2) $0 $0 $0 $0

EBIT 1% -5% 7% 4% 4% $74 ($299) $393 $273 $285

Equity Income -13% 28% 5% 5% 5% ($113) $219 $50 $53 $55

Reported EBIT -1% -1% 7% 5% 5% ($39) ($80) $443 $325 $340

ESPN subs (m) -2.0% -2.0% -2.0% -2.0% -2.0% (4.7) (1.8) (1.8) (1.8) (1.7)

ESPN rates ($/sub/month) 7.0% 5.0% 7.0% 7.0% 7.0% $0.46 $0.35 $0.52 $0.55 $0.59

ABC retrans ($m) 17% 15% 12% 10% 10% $86 $84 $81 $74 $81

ESPN programming ($m) 1% 15% 3% 5% 5% $45 $676 $155 $267 $280

y/y ∆ ($m)y/y ∆ (%)

10 January 2017


Forecasts and valuation

We make modest adjustments to our model, which result in a 1% reduction in our EPS

forecasts in 2017/18 to $5.94/$6.76 (previously $6.00/$6.79). The main driver of our lower

forecasts is lower forecasts for the Consumer Products division, where we now expect 2%

growth in operating income (previously 9%). A summary of the changes we have are in

Figure 268, and we publish our full financial statements forecasts in Figure 273 to Figure

275.

Figure 268: DIS summary changes to Income Statement forecasts


At our $125 Target Price, DIS would trade at 12.5x '17 EV/EBITDA, 21.1x '17 P/E, within

the stock's recent trading range (see Figure 269 and Figure 270). Our valuation is

supported by our DCF (see Figure 271), which uses a 2% terminal growth and 7.4%

WACC. Our Blue Sky valuation is $148, which equates to 14.5x 2017 EV/EBITDA, and

includes a 100bp addition to 2017-20 Cable Networks sub growth. Our Grey Sky valuation

is $102, which equates to 10.5x 2017 EV/EBITDA, and includes a 100bp reduction to

Cable Networks sub growth (see Figure 272).

Figure 269: Disney 12m forward EV/EBITDA Figure 270: Disney 12m forward P/E


2016

New Old ∆ % y/y % New Old ∆ % y/y % New Old ∆ % y/y %

Revenue

Cable Networks $16,632 $17,341 $17,435 -1% $18,159 $18,258 -1% $19,015 $19,120 -1%

Broadcasting $7,057 $7,086 $6,908 3% $7,251 $7,073 3% $7,397 $7,222 2%

Media Networks $23,689 $24,427 $24,343 0% $25,410 $25,331 0% $26,412 $26,342 0%

Parks & Resorts $16,974 $19,052 $18,751 2% $20,095 $19,769 2% $21,202 $20,851 2%

Studio Entertainment $9,441 $9,345 $8,954 4% $10,396 $9,996 4% $9,990 $9,580 4%

Consumer Products & Interactive Media $5,528 $5,905 $6,094 -3% $6,304 $6,503 -3% $6,608 $6,816 -3%

Total Revenue $55,632 $58,729 $58,142 1% 6% $62,204 $61,599 1% 6% $64,212 $63,589 1% 3%

Segment Operating Income

Cable Networks $6,748 $6,668 $6,696 0% $7,111 $7,005 2% $7,436 $7,326 1%

Broadcasting $1,007 $1,318 $1,316 0% $1,386 $1,391 0% $1,427 $1,444 -1%

Media Networks $7,755 $7,985 $8,012 0% $8,496 $8,396 1% $8,863 $8,770 1%

Parks & Resorts $3,298 $3,617 $3,610 0% $3,865 $3,849 0% $4,130 $4,103 1%

Studio Entertainment $2,703 $2,509 $2,526 -1% $2,831 $2,907 -3% $3,107 $3,071 1%

Consumer Products & Interactive Media $1,965 $2,012 $2,165 -7% $2,293 $2,456 -7% $2,475 $2,646 -6%

Segment Operating Income $15,721 $16,123 $16,313 -1% 3% $17,486 $17,608 -1% 8% $18,576 $18,590 0% 6%

Net Income $9,391 $9,445 $9,533 -1% $10,296 $10,330 0% $10,961 $10,928 0%

EPS $5.72 $5.94 $6.00 -1% 4% $6.76 $6.79 -1% 14% $7.59 $7.58 0% 12%

2019E2018E2017E

0.00x

2.00x

4.00x

6.00x

8.00x

10.00x

12.00x

14.00x

1/8/2007 1/8/2008 1/8/2009 1/8/2010 1/8/2011 1/8/2012 1/8/2013 1/8/2014 1/8/2015 1/8/2016

DIS 12m fwd EV/EBITDA

0.00x

5.00x

10.00x

15.00x

20.00x

25.00x

1/8/2007 1/8/2008 1/8/2009 1/8/2010 1/8/2011 1/8/2012 1/8/2013 1/8/2014 1/8/2015 1/8/2016

DIS 12m fwd PE

10 January 2017


Figure 271: Disney DCF valuation


Figure 272: Disney Blue and Grey Sky valuations


2014 2015 2016 2017E 2018E 2019E 2020E

EBITDA $14,439 $16,221 $17,654 $17,750 $19,143 $20,269 $21,141

Net Income $7,624 $8,806 $9,372 $9,445 $10,296 $10,961 $11,461

Depreciation & Amortization $2,288 $2,354 $2,527 $2,629 $2,714 $2,803 $2,895

Other Non-Cash Charges $(240) $(426) $1,798 $375 $352 $330 $307

After Tax Interest Expense (Income) $222 $251 $311 $348 $357 $369 $381

Changes in Operating Assets & Liabilities $(272) $129 $(902) $(428) $9 $51 $118

Unlevered Cash Flows $9,622 $11,113 $13,106 $12,370 $13,729 $14,513 $15,162

Levered FCF

Y/Y % Change 2.9% 15.5% 17.9% (5.6)% 11.0% 5.7% 4.5%

Capital Expenditures $(2,797) $(3,003) $(4,602) $(2,624) $(2,461) $(2,593) $(2,733)

Unlevered Free Cash Flows $6,826 $8,110 $8,504 $9,746 $11,267 $11,920 $12,430

Y/Y % Change 0.2% 18.8% 4.9% 14.6% 15.6% 5.8% 4.3%

Perpetual UFCF Growth Rate ("G") 2.0%

Terminal Value $235,242

Terminal EBITDA Multiple 11.1x

Weighted Average Cost of Capital 7.4%

NPV of Unlevered Free Cash Flows $38,488

Present Value of Terminal Value $179,990

Enterprise Value $218,478

Minus:

Minority Interest $4,058

Adjusted Enterprise Value $214,420

Less:

Year End Net Debt (Cash) $15,560

Equity Value $198,860

Diluted Shares Outstanding 1,590.9

Equity Value Per Share $125

Blue Sky Valuation

9.5x 10.5x 11.5x 12.5x 13.5x 14.5x 15.5x

2017 EBITDA ($m) $17,812 $17,812 $17,812 $17,812 $17,812 $17,812 $17,812

EV $169,215 $187,027 $204,839 $222,652 $240,464 $258,276 $276,088

Net Debt ($m) ($18,571) ($18,571) ($18,571) ($18,571) ($18,571) ($18,571) ($18,571)

Minority Interest ($) ($4,058) ($4,058) ($4,058) ($4,058) ($4,058) ($4,058) ($4,058)

Equity value ($) $146,586 $164,398 $182,210 $200,023 $217,835 $235,647 $253,459

Equity value per share ($) $92 $103 $115 $126 $137 $148 $159

Grey Sky Valuation

9.5x 10.5x 11.5x 12.5x 13.5x 14.5x 15.5x

2017 EBITDA ($m) $17,689 $17,689 $17,689 $17,689 $17,689 $17,689 $17,689

EV $168,042 $185,731 $203,419 $221,108 $238,797 $256,485 $274,174

Net Debt ($m) ($18,631) ($18,631) ($18,631) ($18,631) ($18,631) ($18,631) ($18,631)

Minority Interest ($) ($4,058) ($4,058) ($4,058) ($4,058) ($4,058) ($4,058) ($4,058)

Equity value ($) $145,354 $163,042 $180,731 $198,419 $216,108 $233,797 $251,485


10 January 2017


Figure 273: Disney summary Income Statements 2013-2020E


2013 2014 2015 2016 2017E 2018E 2019E 2020E CAGR

'16-'20E

Revenue

Cable Networks $14,453 $15,110 $16,581 $16,632 $17,341 $18,159 $19,015 $19,912 4.6%

Broadcasting $5,903 $6,042 $6,683 $7,057 $7,086 $7,251 $7,397 $7,574 1.8%

Media Networks $20,356 $21,152 $23,264 $23,689 $24,427 $25,410 $26,412 $27,487 3.8%

Parks & Resorts $14,087 $15,099 $16,162 $16,974 $19,052 $20,095 $21,202 $22,387 7.2%

Studio Entertainment $5,979 $7,278 $7,366 $9,441 $9,345 $10,396 $9,990 $9,577 0.4%

Consumer Products & Interactive Media $4,619 $5,284 $5,673 $5,528 $5,905 $6,304 $6,608 $6,914 5.8%

Total Revenue $45,041 $48,813 $52,465 $55,632 $58,729 $62,204 $64,212 $66,364 4.5%

EBITDA

Cable Networks $5,405 $5,723 $6,052 $6,121 $5,823 $6,218 $6,492 $6,778 2.6%

Broadcasting $923 $992 $1,194 $1,292 $1,418 $1,482 $1,524 $1,596 5.4%

Media Networks $6,327 $6,715 $7,245 $7,413 $7,241 $7,699 $8,016 $8,374 3.1%

Parks & Resorts $3,590 $4,137 $4,548 $5,022 $5,409 $5,724 $6,059 $6,417 6.3%

Studio Entertainment $822 $1,685 $2,112 $2,828 $2,637 $2,963 $3,243 $3,205 3.2%

Consumer Products & Interactive Media $1,215 $1,663 $2,067 $2,140 $2,205 $2,490 $2,676 $2,862 7.5%

Corporate (D&A Addback) $274 $239 $249 $251 $259 $266 $274 $283 3.0%

Total EBITDA $12,228 $14,439 $16,221 $17,654 $17,750 $19,143 $20,269 $21,141 4.6%

Revenues $45,041 $48,813 $52,465 $55,632 $58,729 $62,204 $64,212 $66,364 4.5%

Segment Operating Expenses $32,813 $34,374 $36,244 $37,978 $40,978 $43,060 $43,943 $45,222 4.5%

Segment EBITDA $12,228 $14,439 $16,221 $17,654 $17,750 $19,143 $20,269 $21,141 4.6%

Corporate Expense ($531) ($611) ($643) ($640) ($672) ($706) ($741) ($778) 5.0%

Other $0 $0 $0 ($129) $0 $0 $0 $0

EBITDA $11,697 $13,828 $15,578 $16,885 $17,078 $18,438 $19,528 $20,363 4.8%

Depreciation $1,957 $2,064 $2,132 $2,320 $2,404 $2,484 $2,568 $2,655 3.4%

Amortization $235 $224 $222 $207 $225 $230 $235 $240 3.8%

EBIT $9,505 $11,540 $13,224 $14,358 $14,449 $15,724 $16,725 $17,468 5.0%

Equity Income of Investees $633 $854 $814 $926 $1,002 $1,057 $1,110 $1,165 5.9%

EBIT Inc. Equity Income $10,138 $12,394 $14,038 $15,284 $15,451 $16,781 $17,835 $18,633 5.1%

Restructuring and Impairment Charges ($214) ($140) ($53) ($156) $0 $0 $0 $0

Other Income (Expense) ($69) ($31) $0 $0 $0 $0 $0 $0

Net Interest (Expense) ($235) $23 ($117) ($260) ($483) ($501) ($527) ($545)

Income b/f Taxes $9,620 $12,246 $13,868 $14,868 $14,968 $16,279 $17,308 $18,088 5.0%

Income Tax (Expense)/Benefit ($2,984) ($4,242) ($5,016) ($5,078) ($5,112) ($5,560) ($5,911) ($6,178) 5.0%

Net Income (Loss) a/f Extr. I tems $6,636 $8,004 $8,852 $9,790 $9,856 $10,719 $11,397 $11,910 5.0%

Net Inc. Attrib. to Noncontrolling Int. ($500) ($503) ($470) ($399) ($411) ($423) ($436) ($449) 3.0%

Net Inc. Attirb. to DIS Shareholders $6,136 $7,501 $8,382 $9,391 $9,445 $10,296 $10,961 $11,461 5.1%

Restructuring Charges/Extr. Items, Net $16 $123 $424 ($19) $0 $0 $0 $0

Net Income (Loss) b/f Extr. I tems $6,152 $7,624 $8,806 $9,372 $9,445 $10,296 $10,961 $11,461 5.2%

Diluted Shares Outstanding 1,813.0 1,759.0 1,709.0 1,639.0 1,590.9 1,523.1 1,444.4 1,361.6 (4.5% )

Diluted EPS b/f Extr. I tems (Adj.) $3.39 $4.33 $5.15 $5.72 $5.94 $6.76 $7.59 $8.42 10.2%

Y/Y % Change 10.7% 27.7% 18.9% 11.0% 3.8% 13.9% 12.2% 10.9% (0.1% )

Diluted EPS a/f Extr. I tems $3.38 $4.26 $4.90 $5.73 $5.94 $6.76 $7.59 $8.42 10.1%

10 January 2017


Figure 274: Disney summary Cash Flow Statements 2013-2020E


2013 2014 2015 2016 2017E 2018E 2019E 2020E

OPERATING ACTIVITIES

Net Income $6,636 $8,004 $8,852 $9,790 $9,856 $10,719 $11,397 $11,910

Depreciation $1,957 $2,064 $2,132 $2,320 $2,404 $2,484 $2,568 $2,655

Amortization of Intangible Assets $235 $224 $222 $207 $225 $230 $235 $240

Cash Distributions Received From Equity Investees $694 $718 $752 $799 $865 $912 $958 $1,005

Equity in Income of Investees ($688) ($854) ($814) ($926) ($1,002) ($1,057) ($1,110) ($1,165)

Impairment Charges $0 $0 $0 $0 $0 $0 $0 $0

Gains on Dispositions ($252) ($299) ($91) ($26) $0 $0 $0 $0

Change in Film and Television Costs ($49) ($964) ($922) ($101) ($326) ($341) ($356) ($372)

Equity Based Compensation $402 $408 $410 $393 $393 $393 $393 $393

Deferred Income Taxes $92 $517 ($102) $1,214 $0 $0 $0 $0

Other $322 $234 $341 $445 $445 $445 $445 $445

Change in Operating Assets and Liabilities $103 ($272) $129 ($902) ($428) $9 $51 $118

Net Cash Flow Provided by Operating Activities $9,452 $9,780 $10,909 $13,213 $12,432 $13,795 $14,580 $15,231

INVESTING ACTIVITIES

Investments in Theme Parks, Resorts & Other Property ($2,796) ($3,311) ($4,265) ($4,773) ($2,624) ($2,461) ($2,593) ($2,733)

Acquisitions (Net of Cash Acquired) ($2,443) ($402) $0 ($850) $0 $0 $0 $0

Proceeds from Dispositions $397 $395 $166 $45 $0 $0 $0 $0

Other $166 ($27) ($146) ($180) $0 $0 $0 $0

Net Cash Flow Provided by Investing Activities ($4,676) ($3,345) ($4,245) ($5,758) ($2,624) ($2,461) ($2,593) ($2,733)

Cash Flow After Investing Activities $4,776 $6,435 $6,664 $7,455 $9,809 $11,334 $11,987 $12,498

FINANCING ACTIVITIES

Commercial Paper Borrowings, Net ($2,050) $50 $2,376 ($920) $1,444 $3,661 $3,481 $3,441

Borrowings $3,931 $2,231 $2,550 $6,065 $0 $0 $0 $0

Reduction of Borrowings ($1,502) ($1,648) ($2,221) ($2,205) $0 $0 $0 $0

Repurchase of Common Stock ($4,087) ($6,527) ($6,095) ($7,499) ($10,000) ($12,000) ($12,360) ($12,731)

Repurchase of Shares Issued for Acquisitions $0 $0 $0 $0 $0 $0 $0 $0

Exercise of Stock Options $587 $404 $329 $259 $0 $0 $0 $0

Dividends ($1,324) ($1,508) ($3,063) ($2,313) ($2,485) ($2,617) ($2,730) ($2,831)

Other $231 $288 $610 ($378) ($378) ($378) ($378) ($378)

Net Cash flow Used in Financing Activities ($4,214) ($6,710) ($5,514) ($6,991) ($11,419) ($11,334) ($11,987) ($12,498)

Net Increase in Cash $544 ($510) $848 $341 ($1,610) $0 $0 $0

Cash Balance at Beginning of the Year $3,387 $3,931 $3,421 $4,269 $4,610 $3,000 $3,000 $3,000

Cash at End of Year $3,931 $3,421 $4,269 $4,610 $3,000 $3,000 $3,000 $3,000

10 January 2017


Figure 275: Disney summary Balance Sheets 2013-2020E


2013 2014 2015 2016 2017E 2018E 2019E 2020E

ASSETS

Current Assets

Cash & Equivalents $3,931 $3,421 $4,269 $4,610 $3,000 $3,000 $3,000 $3,000

Receivables $6,967 $7,822 $8,019 $9,065 $8,624 $8,823 $8,787 $8,750

Inventories $1,487 $1,574 $1,571 $1,390 $1,759 $1,863 $1,923 $1,987

TV Costs $634 $1,061 $1,170 $1,208 $1,280 $1,357 $1,439 $1,525

Deferred Income Taxes $485 $497 $767 $0 $0 $0 $0 $0

Other Assets $605 $794 $962 $693 $693 $693 $693 $693

Total Current Assets $14,109 $15,169 $16,758 $16,966 $15,356 $15,736 $15,841 $15,955

Film & TV Costs $4,783 $5,325 $6,183 $6,339 $6,593 $6,856 $7,131 $7,416

Investments $2,849 $2,696 $2,643 $4,280 $4,280 $4,280 $4,280 $4,280

Theme Parks, Resorts & Other Properties $22,380 $23,332 $25,179 $27,349 $27,569 $27,546 $27,572 $27,649

Intangible Assets, net $7,370 $7,434 $7,172 $6,949 $6,724 $6,494 $6,259 $6,018

Goodwill $27,324 $27,881 $27,826 $27,810 $27,810 $27,810 $27,810 $27,810

Other Assets $2,426 $2,304 $2,421 $2,340 $2,340 $2,340 $2,340 $2,340

Total Assets $81,241 $84,141 $88,182 $92,033 $90,671 $91,062 $91,232 $91,468

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities

Accounts & Taxes Payable and other Accrued Liab. $6,803 $7,595 $7,844 $9,130 $8,630 $8,942 $9,017 $9,163

Current Portion of Borrowings $1,512 $2,164 $4,563 $3,687 $3,686 $1,815 $2,759 $896

Unearned Royalties and Other Advances $3,389 $3,533 $3,927 $4,025 $4,431 $4,651 $4,752 $4,893

Total Current Liabilities $11,704 $13,292 $16,334 $16,842 $16,747 $15,409 $16,529 $14,952

Borrowings $12,776 $12,631 $12,773 $16,483 $17,915 $23,433 $25,956 $31,247

Deferred Income Taxes $4,050 $4,098 $4,051 $3,679 $3,679 $3,679 $3,679 $3,679

Other Long Term Liabilities $4,561 $5,942 $6,369 $7,706 $8,047 $8,579 $9,236 $9,858

Long-term Liabilities $21,387 $22,671 $23,193 $27,868 $29,641 $35,691 $38,871 $44,783

Total Liabilities $33,091 $35,963 $39,527 $44,710 $46,388 $51,100 $55,399 $59,735

Shareholders' Equity

Preferred Stock, $0.01 par value $0 $0 $0 $0 $0 $0 $0 $0

Common Stock, $0.01 par value $33,440 $34,301 $35,122 $35,859 $35,859 $35,859 $35,859 $35,859

Retained Earnings $47,758 $53,734 $59,028 $66,088 $73,048 $80,727 $88,958 $97,588

Cumulative Translation & Other ($1,187) ($1,968) ($2,421) ($3,979) ($3,979) ($3,979) ($3,979) ($3,979)

Treasury Stock, at cost ($34,582) ($41,109) ($47,204) ($54,703) ($64,703) ($76,703) ($89,063) ($101,794)

Shares held by TWDC Stock Compensation Fund $0 $0 $0 $0 $0 $0 $0 $0

Total Shareholders' Equity - DISNEY $45,429 $44,958 $44,525 $43,265 $40,225 $35,904 $31,775 $27,675

Non Controlling Interest $2,721 $3,220 $4,130 $4,058 $4,058 $4,058 $4,058 $4,058

Total Equity $48,150 $48,178 $48,655 $47,323 $44,283 $39,962 $35,833 $31,733

Total Liabilities & Shareholders' Equity $81,241 $84,141 $88,182 $92,033 $90,671 $91,062 $91,232 $91,468

10 January 2017


Key Charts

Figure 276: Disney Revenue 2017E Figure 277: Disney Operating Income 2017E


Figure 278: Disney segment revenue trend 2005-18E Figure 279: Disney segment EBIT trend 2005-18E


Figure 280: Disney Cable Networks Revenue Mix

2005-20E

Figure 281: Disney average license fee per sub. per

month 2004-15


Cable Networks29%

Broadcasting12%




10%

Interactive Media2%

Cable Networks41%

Broadcasting8%




12%

Interactive Media1%

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E


$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

$20,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E


$0

$5,000

$10,000

$15,000

$20,000

$25,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E

Affiliate fees Advertising revenue Other revenue

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

ESPN ESPN 2 ESPN News ESPN U ESPN Classic Sports

10 January 2017


Segment LTM OI and margins

Figure 282: Disney LTM Cable Networks operating

income

Figure 283: Disney LTM Cable Networks operating

income margin


Figure 284: Disney LTM Broadcasting operating

income

Figure 285: Disney LTM Broadcasting operating

income margin


Figure 286: Disney LTM Studio Entertainment

operating income

Figure 287: Disney LTM Studio Entertainment

operating income margin


$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

Cable Networks

Cable Networks

36%

37%

38%

39%

40%

41%

42%

43%

44%

45%

46%

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

Cable Networks

Cable Networks

$0

$200

$400

$600

$800

$1,000

$1,200

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

Broadcasting

Broadcasting

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

Broadcasting

Broadcasting

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

Studio Entertainment


0%

5%

10%

15%

20%

25%

30%

35%

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16



10 January 2017


Figure 288: Disney LTM Parks operating income

Figure 289: Disney LTM Parks operating income

margin


Figure 290: Disney LTM Consumer Products and

Interactive Media operating income

Figure 291: Disney LTM Consumer Products and

Interactive Media operating income margin


$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

Parks & Resorts

Parks & Resorts

8%

10%

12%

14%

16%

18%

20%

22%

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

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10 January 2017



Discovery Communications (DISCA) Rating (from NEUTRAL) UNDERPERFORM Price (06-Jan-17, US$) 27.48 Target price (12-mth, US$) (from 25.00) 23.00 52-week price range 29.55 - 23.73 Market cap (US$ m) 10,783.14 *Stock ratings are relative to the coverage universe in each



Research Analysts

Omar Sheikh

212 325 6818

[email protected]


212 538 8442

[email protected]

Boyao Sun

212 325 3494

[email protected]

Domestic headwinds building

■ Cut rating and TP: We lower our rating on Discovery to UP (from N), and

highlight the stock as our least preferred in US Media/Cable. We have a more

cautious view on domestic advertising revenues in 2017, given ongoing

pressure on ratings, and remain cautious on the potential payback from the

investment in international sports rights and the current high relative

valuation. We reduce our TP to $23 (previously $25), based on a lower target

multiple of 9x 2017 EV/EBITDA (previously 9.5x).

■ Ratings suffering from shift to news: Discovery's domestic ratings dipped

materially during 2016, and the latest data from Nielsen suggests there was

no respite in Q4. The outcome of the US Presidential election is likely to

continue to drive audiences to news networks, and we see Discovery's

factual networks as particularly vulnerable to losing share. This will put

pressure on the group's US advertising revenues in 2017, in our view.

■ Returns from investment in premium sport highly uncertain: Discovery's

pivot from niche to premium sports with the investment in Bundesliga and

Olympics rights are likely to add a net c$60m of fixed costs in 2017, rising to

c$280m in 2018. This will increase the volatility of international earnings

(c40% advertising in 2017/18), and we remain skeptical that ownership of

these rights can provide a meaningful payback for investors over time.

■ Catalysts: Quarterly ratings and advertising data from Discovery and peers,

news on inclusion/exclusion from "virtual" MVPDs.

■ Valuation: Discovery trades at 9% premium to peers on 2017 EV/EBITDA

(10.0x vs 9.2x), but on a c2% premium on 2017 P/E (12.8x vs 12.6x). Given

the genre mix of the domestic networks, we believe a discount to peers is

justified and now use a target multiple of 9x EV/EBITDA.



Daily Jan08, 2016 - Jan06, 2017, 01/08/16 = US$26.01



Year 12/15A 12/16E 12/17E 12/18E EPS (CS adj.) (US$) 1.76 2.07 2.15 2.45 Prev. EPS (US$) - - - - P/E (x) 15.6 13.3 12.8 11.2 P/E rel. (%) 80.0 69.0 74.1 72.5 Revenue (US$ m) 6,394.0 6,532.1 6,935.5 7,551.6 EBITDA (US$ m) 2,398.0 2,476.9 2,435.0 2,628.8 OCFPS (US$) 1.95 2.41 2.62 2.93 P/OCF (x) 13.7 11.4 10.5 9.4 EV/EBITDA (current) 10.2 9.9 10.0 9.3 Net debt (US$ m) 7,345 7,786 7,786 7,786 ROIC (%) 10.24 11.08 10.90 11.64

Number of shares (m) 392.40 IC (current, US$ m) 13,037.00 BV/share (Next Qtr., US$) - EV/IC (x) - Net debt (Next Qtr., US$ m) - Dividend (current, US$) - Net debt/tot eq (Next Qtr.,%) - Dividend yield (%) - Source: Company data, Thomson Reuters, Credit Suisse estimates

10 January 2017


What's changed?

■ We downgrade our rating on Discovery to Underperform (from Neutral), driven by a

more cautious view on domestic advertising in 2017. We continue to be cautious on (i)

the genre mix of the domestic networks, which could mean they are left out of new

"virtual" MVPDs, and could therefore put pressure on future domestic affiliate revenue

growth; (ii) the potential payback from the investment in international sports rights; and

(iii) the current high relative valuation vs peers.

■ We slightly reduce our TP to $23 (from $25), based on a lower target multiple of 9x

2017 EV/EBITDA (previously 9.5x 2017 EV/EBITDA).

Domestic advertising at risk from weak ratings

C3 ratings at many of Discovery's core networks weakened during 2016 (see Figure 292).

The performance of the flagship Discovery Channel was particularly weak in Q4 2016 (see

Figure 294 and Figure 295). Although the Olympics and the Election have had some effect

on overall viewership, Discovery's performance in recent quarters has still been

significantly weaker than other networks targeting the same demographic.

Figure 292: Long term C3 ratings at Discovery's core

networks have weakened…

Figure 293: …and growth at some of Discovery's

small networks has also slowed


Note: Q4 data is through 12/14/16 as C3 data is released on a 2-week delay. Total day C3 ratings based on target demographics: P25-54 for Discovery Channel, Animal Planet, and Investigation Discovery; and F18-49 for TLC and Oprah Winfrey Network.


Note: Q4 data is through 12/14/16 as C3 data is released on a 2-week delay. Total day C3 ratings based on target demographics: P25-54 for Science, American Heroes, Destination America, and Discovery Life; P2-11 for Discovery Family; and M18-49 for Velocity.

Figure 294: During Q4, Discovery Channel

underperformed competing P25-54 networks…

Figure 295: …and three of Discovery's core

networks suffering ratings declines in Q4


Note: Q4 data is through 12/14/16 as C3 data is released on a 2-week delay. Total Day C3 ratings based on target demographics: P25-54 for Discovery Channel, CNN, Fox News, MSNBC, A&E, and TV Land.


Note: Q4 data is through 12/14/16 as C3 data is released on a 2-week delay. Total day C3 ratings based on target demographics: P25-54 for Discovery Channel, Animal Planet, and Investigation Discovery; and F18-49 for TLC and Oprah Winfrey Network.

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DISCOVERY CHANNEL TLC

ANIMAL PLANET INVESTIGATION DISCOVERY


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SCIENCE AMERICAN HEROES DESTINATION AMERICA

DISCOVERY LIFE DISCOVERY FAMILY VELOCITY

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83%

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P25-54 Demographic

A&E NETWORK DISCOVERY CHANNEL TV LAND CNN FOX NEWS CHANNEL MSNBC

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DISCOVERY CHANNEL INVESTIGATION DISCOVERY ANIMAL PLANET TLC OPRAH WINFREY NETWORK

10 January 2017


As we highlight in Figure 296, ratings pressure has been a drag on US advertising

revenues in recent years, with declines in ratings pulling annual growth from double digits

in 2013 to negative territory in Q3 2016. Given the surprising outcome of the Presidential

Election, we expect the political news cycle to remain strong through at least the first half

of 2017, driving viewership at major news networks (e.g. CNN, Fox News, MSNBC).

These networks directly compete with seven of Discovery's networks for the audience of

adults 25-54 (P25-54), therefore strength in news will further pressure Discovery's

domestic ratings, in our view. Consensus expectations for domestic advertising growth are

flat to slightly up (CS +1%), and we believe there could some downside risks to this.

Figure 296: Discovery's domestic ratings have been

declining since 2013, and have pulled US ad growth

down from double digit growth to a slight decline

Figure 297: Four flagship channels deliver 77% of

Discovery's US ratings


Note: Q4 data is through 12/14/16 as C3 data is released on a 2-week delay. Total day C3 ratings based on target demographics: P25-54 for Discovery Channel, Animal Planet, Science and Investigation Discovery; and F18-49 for TLC.


Note: C3 Ratings based on target demographics: P25-54 for Discovery Channel, Animal Planet, Investigation Discovery, Science, American Heroes, Destination America, Discovery Life; F18-49 for TLC & OWN; M18-49 for Velocity, and P2-11 for Discovery Family.

Inclusion in vMVPDs important swing factor for

domestic affiliate revenues

As discussed in our 2017 outlook (see our industry report above), we regard the launch of

"virtual" MVPDs including DirecTV NOW and Hulu as a positive development for the US

video ecosystem. As we argue in our outlook report, this is because vMVPDs offer the

convenience of on-demand access to content – so compete on the new "basis of

competition" in the industry (see Figure 249) – but also buy content in a bundle, i.e. in the

form of a linear network rather than an individual series. In other words, DirecTV NOW and

Hulu look well-placed to challenge the value proposition of SVOD aggregators including

Netflix and Amazon and should slow down the rate of decline in overall pay TV

subscribers in the industry over the coming quarters.

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E

US advertising y/y % change C3 ratings (weighted average) y/y % change

Discovery Channel33%

TLC19%Animal Planet

10%

Investigation Discovery15%

Science Channel6%

Velocity2%

Destination America4%

Discovery Life / aka Discovery Fit and Health

2%

American Heroes Channel / aka Military

Channel2%

Other7%

10 January 2017





Figure 299: The "virtual" MVPD strategy disrupts the disruptors, and media

companies' content licensing can further dampen the threat from SVOD



However, this positive dynamic for the industry only benefits those networks that are

included in vMPVD bundles – those which are excluded will continue to suffer from the

declining subscriber base of traditional MVPDs (see Figure 301). Discovery's networks are

included in DirecTV NOW but it is not yet clear they will be included in Hulu's live

streaming service, which we believe will be the most successful of the vMVPDs. According

to recent comments from Hulu's CEO, the retail price of their new service will be "below

$40 per month". As we show in Figure 302 to Figure 304, given the wholesale cost of

other networks likely to be included in the Hulu live streaming bundle, we believe there is a

real risk Discovery networks are left out.

As we highlight in Figure 300, Discovery's US affiliate revenues are growing at 7% pa on

an LTM basis. It might appear easier for Discovery to achieve rate increases for its

networks than some competitors, given its relatively low absolute affiliate fees per

subscriber, but we would argue pricing power depends on the value proposition of the

Access

Access to TV

Volume

Number of Networks

Functionality

DVR/HD

Convenience

On-Demand

Price?


Incumbents

Innovators

Innovation Barriers

Time Period

Duration




1941-1980 1980-1995 1995-2010 2010-2025?


2025-?

Performance

Time20172007 2027





“Virtual” MVPDs

10 January 2017


networks relative to other content providers – and given the genre mix and ratings

performance, we think it is hard to see how Discovery's negotiating position with affiliates

is getting stronger.

Figure 300: Discovery's US affiliate revenue growth

remains above 5% on an LTM basis

Figure 301: Excluding vMVPDs, the rate of decline

in overall industry subscribers is running around -

2%

Source: Company data, Credit Suisse estimates Source: Company data, SNL Kagan, Credit Suisse estimates

Figure 302: Hulu live streaming – base case assumption for content costs

Source: SNL Kagan, Credit Suisse estimates, Company Data

Note:: A full interactive model for bundle content costs, which allows you to choose which networks to include/exclude, is available on request

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Programming Costs # of networks 2012 2013 2014 2015 2016 2017 2018 2019

Basic Cable

Disney 8 7.53 8.16 9.61 10.38 11.26 12.20 13.15 14.17

Fox 9 2.58 2.95 3.49 4.16 4.61 5.00 5.44 5.92

NBC 8 2.62 2.79 3.06 3.17 3.30 3.41 3.55 3.66

Time Warner 8 3.10 3.25 3.63 3.82 4.33 4.86 5.37 5.82

CBS (CBS Sports Net/Smithsonian) 1 0.23 0.24 0.25 0.25 0.26 0.28 0.29 0.31

Viacom 0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

AMC Networks 0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Discovery 0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Scripps 0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

A&E 0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Univison (cable channels) 0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Other Networks 2 0.39 0.38 0.39 0.42 0.43 0.46 0.48 0.51

Broadcast

Big Four (ABC, FOX, NBC, CBS) - SNL Kagan 4 1.56 2.40 3.28 4.36 5.63 7.45 8.34 9.12

Other Networks 0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

RSNs

Fox 22 1.75 1.86 1.87 2.09 2.18 2.36 2.59 2.75

Comcast 7 0.48 0.50 0.55 0.61 0.67 0.73 0.79 0.84

Pac-12 0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

ROOT Sports (AT&T) 0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Time Warner Cable 0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

MSGN 0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Other 0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Total Basic Cable 34 $16.45 $17.77 $20.43 $22.20 $24.19 $26.21 $28.28 $30.39

Total Broadcast 4 $1.56 $2.40 $3.28 $4.36 $5.63 $7.45 $8.34 $9.12

Total RSNs 29 $2.23 $2.36 $2.42 $2.69 $2.85 $3.10 $3.38 $3.59

Grand Total 67 $20.24 $22.53 $26.13 $29.25 $32.67 $36.76 $40.00 $43.11

10 January 2017


Figure 303: Hulu could generate EBIT of c$6 per

sub/month if VIAB/DISCA/AMC/SNI are excluded…

Figure 304: …but just $1 per sub per month if those

networks are included

Source: SNL Kagan, Credit Suisse estimates Source: SNL Kagan, Credit Suisse estimates

Payback on sports rights could disappoint

Discovery has announced plans to invest heavily in sports content, and we estimate the

incremental cost of Bundesliga and Olympics rights will total a net c$60m in 2017 and

c$280m in 2018 (see Figure 316). The pivot from "niche" to "premium" sports rights at

Eurosport substantially raises its fixed cost base, and we would argue there is every

possibility that the investment will have limited payback for shareholders. We would

particularly highlight the risk that the investment in Bundesliga proves disappointing –

Eurosport's package (Pack A, see Figure 306) is concentrated on Friday evening matches,

which will compete against prime time viewing of drama/series content on other German

channels. This will make it hard to drive viewership, in our view.

Figure 305: Discovery's sports investment will step up significantly from 2018


Figure 306: Discovery's investment in Bundesliga is concentrated on Friday

night matches, which will compete against drama/series content on German TV

Source: Sky, Credit Suisse estimates

$40

$46

$5.58

$5.74

$36.76

$2$2

$0

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Sub revenue Ad revenue Programming Marketing SG&A EBIT

$40

$46

$1.05

$5.74

$41.29

$2$2

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Sub revenue Ad revenue Programming Marketing SG&A EBIT

2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E

Bundesliga (€) 55 120 140 160 85

Bundesliga ($) 58 126 147 168 89

Olympics - gross payments (€) 300 310 320 340

Olympics - sub-licensing (€) 150 160 170 190

Olympics - net payment (€) 150 150 150 150

Olympics - net payment ($) 158 158 158 158

Bundesliga + Olympics 58 284 147 326 89 158 158

Pack Slot Games New deal Previous deal

A Fri 20.30 40 Eurosport Sky

Sun 13.30 (5x) 3 Supercup and 2 BL2 relegation games

Mon 20.40 (5x)

B Sat 15.30 36 Konferenz shows Sky Sky

C Sat 15.30 176 Sky Sky

D Sat 18.30 30 Sky Sky

E Sun 15.30 & 18.00 60 Sky Sky

Total 306 (excluding 36 Konferenz games from pack B, relegation games and Supercup)

F Various times 281 matches and 94 Konferenz games Sky Sky

G Mon 20.30 25 Sky Sky and Sport 1

Thur 20.30

H Various times 4 Bundesliga 1 games (1st game of the season, 17th game, 18th game and Supercup) ZDF Sky and ARD

2 Bundesliga2 games (relegation matches)

Total 306 (excluding games from pack H and Konferenz games from pack F)

B/li

ga 2

Bun

desl

iga

1

10 January 2017


Our long term view

■ We have a negative long term view given: (1) Discovery's domestic cable networks are

disproportionately exposed to shrinking US pay TV subscribers given the company is

unlikely to secure carriage on leading "virtual" MVPDs including Sling and the soon-to-

be-launched Hulu live streaming service; (2) we are cautious on the potential long term

payback from the investment in sports rights, which increases the proportion of fixed

costs in Discovery's international business; (3) the stock is already trading at a full

multiple, 10.0x 2017 EV/EBITDA, in line with DIS and CBS and at a significant

premium to VIAB (7.8x) and FOXA (9.6x). We think this may limit the stock's upside in

the short term.

Figure 307: Discovery key guidance summary: Q1-Q3, 2016

Source: Company data

Q1 2016 Q2 2016 Q3 2016

2016 Guidance (ex-FX)

2016 Adj. EPS growth "at least high teens" "at least 20%+" "at least 20% +"

2016 FCF growth "at least high teens" "at least high teens" "at least high teens"

Consolidated OIBDA margin full year expansion full year expansion full year expansion

Effective tax rate 29% 28% 28%

2016 FX Y/Y impacts

Revenue ($100m - $110m) ($150m - $160m) ($150m - $160m)

OIBDA ($70m - $80m) ($80m - $90m) ($80m - $90m)

EPS (positive impact) $0.01 - $0.05 $0.02 - $0.06 $0.02 - $0.06

Segment-specific guidance (ex-FX)

US advertising growth Q2 growth similar to Q1 Q3 down LSD, Q4 positive growth Q4 flat, 50bps impact from Group Nine

US operating expense growth Expense growth to abate in 2H Q3 slightly increasing, Q4 flat growth Q4 flat to down

In'tl advertising growth 2H LDD organic growth 2H mid-high SD organic growth Several hundred bps better than Q3 rate

Int'l distribution growth 2H in HSD range 2H in HSD/LDD range (no update)

Int'l operating expense growth 2H MSD growth "moderating in 2H" total int'l cost growth will slow in Q4

Long term 2015-2018 Guidance (ex-FX)

Adjusted EPS CAGR "at least low double digits" "at least low teens" "at least low teens"

FCF CAGR "up low double digits" "at least low teens" "at least low teens"

In'tl advertising "up HSD range" "up HSD range" "up HSD range"

Int'l affiliate "up HSD range" "up HSD range" "up HSD range"

10 January 2017


Valuation We value Discovery at $23 (from $25), which equates to 9.0x 2017 EV/EBITDA, in line

with the stock's recent trading range (see Figure 308 and Figure 309). Our valuation is

supported by our DCF model (see Figure 310), which uses an 8.5% WACC and 0.6%

terminal growth. Our Blue Sky valuation is $28, which equates to 10.0x 2017 EV/EBITDA,

and includes a 100bp improvement in U.S. Networks and International Networks sub

growth from 2016 to 2020. Our Grey Sky valuation is $19, which equates to 8.0x 2017

EV/EBITDA, and includes a 100bp reduction in sub growth (see Figure 311).

Figure 308: Discovery 12m Forward EV/EBITDA Figure 309: Discovery 12m Forward P/E


Figure 310: Discovery DCF valuation


0.00x

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4.00x

6.00x

8.00x

10.00x

12.00x

14.00x

6/1/2009 6/1/2010 6/1/2011 6/1/2012 6/1/2013 6/1/2014 6/1/2015 6/1/2016

DISCA 12m fwd EV/EBITDA

0.00x

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25.00x

6/1/2009 6/1/2010 6/1/2011 6/1/2012 6/1/2013 6/1/2014 6/1/2015 6/1/2016

DISCA 12m fwd PE

Years to December 2014 2015E 2016E 2017E 2018E 2019E 2020E

EBITDA $2,491 $2,398 $2,477 $2,435 $2,629 $2,474 $2,381

Net Income $1,137 $1,048 $1,179 $1,220 $1,366 $1,279 $1,249

+ Depreciation & Amortization $329 $330 $316 $309 $309 $298 $298

+ Amortization of Deferred launch Incentives $11 $16 $15 $14 $14 $13 $12

+ Other Non-Cash Charges (Benefits) $1,437 $1,804 $2,072 $2,162 $2,317 $2,460 $2,605

+ After Tax Interest Expense (Income) $213 $222 $259 $255 $247 $232 $197

+ Changes in Operating Assets & Liabilities ($1,585) ($1,905) ($2,092) ($2,118) ($2,279) ($2,375) ($2,495)

= Unlevered Cash Flows $1,542 $1,515 $1,748 $1,843 $1,973 $1,908 $1,867

- Capital Expenditures $120 $103 $124 $136 $150 $157 $165

= Unlevered Free Cash Flows $1,422 $1,412 $1,624 $1,707 $1,824 $1,751 $1,702

Y/Y % Change 3.2% (0.7)% 15.0% 5.1% 6.8% (4.0)% (2.8)%

Perpetual UFCF Growth Rate ("G") 0.6%

Terminal EBITDA Multiple 9.1x

Terminal Value $21,672

Weighted Average Cost of Capital 8.5%

NPV of Unlevered Free Cash Flows $5,761

+ Present Value of Terminal Value $15,744

= Enterprise Value $21,505

+ Off-Balance Sheet Assets $423

= Adjusted Enterprise Value $21,928

- Year End Net Debt (Cash) $7,786

- Minority Interest $241

= Equity Value $13,901

/ Diluted Shares Outstanding 600.1

= Equity Value Per Share $23

10 January 2017


Figure 311: Discovery Blue and Grey Sky valuations


Blue Sky Valuation

7.5x 8.0x 8.5x 9.0x 9.5x 10.0x 10.5x

2017 EBITDA ($m) $2,495 $2,495 $2,495 $2,495 $2,495 $2,495 $2,495

EV $18,714 $19,961 $21,209 $22,456 $23,704 $24,951 $26,199

Net Debt ($m) ($7,774) ($7,774) ($7,774) ($7,774) ($7,774) ($7,774) ($7,774)

Minority Interest ($) $182 $182 $182 $182 $182 $182 $182

Equity value ($) $11,122 $12,370 $13,617 $14,865 $16,112 $17,360 $18,607


Grey Sky Valuation

7.5x 8.0x 8.5x 9.0x 9.5x 10.0x 10.5x

2017 EBITDA ($m) $2,375 $2,375 $2,375 $2,375 $2,375 $2,375 $2,375

EV $17,815 $19,002 $20,190 $21,378 $22,565 $23,753 $24,941

Net Debt ($m) ($7,799) ($7,799) ($7,799) ($7,799) ($7,799) ($7,799) ($7,799)

Minority Interest ($) $182 $182 $182 $182 $182 $182 $182

Equity value ($) $10,198 $11,385 $12,573 $13,761 $14,948 $16,136 $17,324


10 January 2017


Figure 312: Discovery summary Income Statements 2013-2020E


Year to December 2013 2014 2015 2016E 2017E 2018E 2019E 2020E CAGR

'15-'20E

Revenue

U.S. Networks $2,947 $2,950 $3,131 $3,294 $3,372 $3,424 $3,462 $3,501 2.3%

International Networks $2,459 $3,157 $3,092 $3,067 $3,385 $3,941 $3,879 $4,242 6.5%

Education & Other $140 $160 $173 $173 $180 $188 $196 $204 3.4%

Corporate & Eliminations ($11) ($2) ($2) ($2) ($2) ($2) ($2) ($2)

Total Revenue $5,535 $6,265 $6,394 $6,532 $6,936 $7,552 $7,535 $7,945 4.4%

Adjusted OIBDA

U.S. Networks $1,712 $1,680 $1,774 $1,918 $1,882 $1,922 $1,860 $1,791 0.2%

International Networks $949 $1,124 $961 $897 $897 $1,057 $971 $955 (0.1% )

Education & Other $30 $6 ($2) ($4) ($4) ($4) ($4) ($4) 13.8%

Corporate & Eliminations ($289) ($319) ($335) ($333) ($340) ($346) ($353) ($360) 1.5%

Total Adjusted OIBDA $2,402 $2,491 $2,398 $2,477 $2,435 $2,629 $2,474 $2,381 (0.1%)

Distribution $2,536 $2,842 $3,068 $3,234 $3,461 $3,832 $3,800 $4,052 5.7%

Advertising $2,738 $3,088 $3,003 $2,972 $3,120 $3,351 $3,354 $3,499 3.1%

Other $261 $335 $323 $326 $354 $369 $381 $395 4.1%

Total Revenue $5,535 $6,265 $6,394 $6,532 $6,936 $7,552 $7,535 $7,945 4.4%

Cost of Revenues (ex D&A) $1,689 $2,124 $2,343 $2,458 $2,740 $3,075 $3,115 $3,503 8.4%

SG&A $1,462 $1,661 $1,669 $1,612 $1,775 $1,862 $1,960 $2,073 4.4%

Add Amort of Deferred Launch Incentives ($18) ($11) ($16) ($15) ($14) ($14) ($13) ($12) (5.0% )

Operating Costs $3,133 $3,774 $3,996 $4,055 $4,501 $4,923 $5,062 $5,564 6.8%

Total Adjusted OIBDA $2,402 $2,491 $2,398 $2,477 $2,435 $2,629 $2,474 $2,381 (0.1%)

Amort of Deferred Launch Incentives $18 $11 $16 $15 $14 $14 $13 $12 (5.0% )

Mark-to-Market Stock Based Comp $136 $31 $0 $20 $0 $0 $0 $0

Depreciation & Amortization $276 $329 $330 $316 $309 $309 $298 $298 (2.0% )

Restructuring & Impairment (Gains) $16 $90 $50 $83 $34 $34 $34 $34

Gains on Dispositions ($19) ($31) $17 ($13) $0 $0 $0 $0

Operating Income $1,975 $2,061 $1,985 $2,056 $2,078 $2,272 $2,128 $2,037 0.5%

Interest (Expense), Net ($306) ($328) ($330) ($359) ($360) ($349) ($327) ($278) (3.4% )

(Loss) on Extinguishment of Debt $0 $0 $0 $0 $0 $0 $0 $0

Other/(Expense) Income, Net $67 $14 ($96) ($60) $0 $0 $0 $0

Inc. from Cont. Ops b/f Income Tax $1,736 $1,747 $1,559 $1,637 $1,718 $1,924 $1,801 $1,760 2.5%

Provision for Income Taxes ($659) ($610) ($511) ($458) ($498) ($558) ($522) ($510) (0.0% )

Inc. from Cont. Ops, Net of Taxes $1,077 $1,137 $1,048 $1,179 $1,220 $1,366 $1,279 $1,249 3.6%

Inc. (Loss) from Disc. Ops, Net of Taxes $0 $0 $0 $0 $0 $0 $0 $0

Net Income $1,077 $1,137 $1,048 $1,179 $1,220 $1,366 $1,279 $1,249 3.6%

Net Inc. Attributable to Noncontrolling Int. $2 ($2) $14 $25 $40 $40 $40 $40

Net Inc. Attributable to DISCA $1,075 $1,139 $1,034 $1,154 $1,180 $1,326 $1,239 $1,209 3.2%

Stock Dividends to Preferred Interests $0 $0 $0 $0 $0 $0 $0 $0

Net Inc. Avbl. to DISCA Stockholders $1,075 $1,139 $1,034 $1,154 $1,180 $1,326 $1,239 $1,209 3.2%

EPS Adjustments

Allocation of undistributed income to Series A convertible preferred $212 $236 $224 $269 $280 $323 $309 $310

Redeemable noncontrolling interest adjustments to redemption value $2 $1 $0 $25 $40 $40 $40 $40

Net Income to DISCA for Basic EPS $861 $902 $810 $885 $900 $1,003 $929 $899

Add Back undistributed series A conv. Pref. $212 $236 $224 $269 $280 $323 $309 $310

Net Income to DISCA for diluted EPS $1,073 $1,138 $1,034 $1,154 $1,180 $1,326 $1,239 $1,209

Cont ops Series A, B and C common $727 $758 $686 $754 $775 $873 $817 $799

Adjusted Diluted EPS $1.63 $1.84 $1.76 $2.07 $2.15 $2.45 $2.37 $2.38 6.2%

10 January 2017


Figure 313: Discovery summary Cash Flow Statements 2013-2020E


Year to December 2013 2014 2015 2016E 2017E 2018E 2019E 2020E


Net Income (Loss) $1,077 $1,137 $1,048 $1,179 $1,220 $1,366 $1,279 $1,249

Share-Based Compensation Liabilities $190 $78 $35 $20 $0 $0 $0 $0

Depreciation & Amortization $276 $329 $330 $316 $309 $309 $298 $298

Content Expense $1,190 $1,557 $1,709 $1,922 $2,128 $2,283 $2,426 $2,571

Impairment Charges $0 $0 $0 $70 $34 $34 $34 $34

Loss (Gains) on Dispositions ($19) ($31) $17 $0 $0 $0 $0 $0

Gains on Sales of Investments ($92) ($29) ($2) $0 $0 $0 $0 $0

Equity in earnings of Discovery Communications Holding, LLC($4) ($1) $8 $60 $0 $0 $0 $0

Deferred Income Taxes $83 ($181) $2 $0 $0 $0 $0 $0

Other Noncash Expenses (Income), Net $105 $44 $35 $0 $0 $0 $0 $0

Changes in Operating Assets & Liabilities, Net of Disc Ops ($1,521) ($1,585) ($1,905) ($2,092) ($2,118) ($2,279) ($2,375) ($2,495)

Cash Provided by Operating Activities $1,285 $1,318 $1,277 $1,474 $1,573 $1,712 $1,663 $1,657


Purchases of property & equipment ($115) ($120) ($103) ($124) ($136) ($150) ($157) ($165)

Business acquisitions, net of cash acquired ($1,861) ($372) ($80) $0 $0 $0 $0 $0

Distributions from Equity Method Investees $47 $61 $87 $0 $0 $0 $0 $0

Investments In and Advances To Equity Method Investees ($28) ($177) ($61) $0 $0 $0 $0 $0

Other Investing Activities, Net ($30) $40 ($144) $0 $0 $0 $0 $0

Cash provided by (used in) investing activities ($1,987) ($568) ($301) ($124) ($136) ($150) ($157) ($165)


Ascent Media Corporation Spin-off $0 $0 $0 $0 $0 $0 $0 $0

Net borrowing (repayments) of Revolver $0 $267 $615 $51 ($390) ($516) ($20) $0

Borrowings from long-term debt, net of issuance costs $1,198 $415 $87 $0 $0 $0 $0 $0

Principal repayments of long term debt $0 $0 $0 $0 $0 $0 $0 $0

Principal repayments of Capital lease Obligations ($32) ($19) ($27) $0 $0 $0 $0 $0

Repurchases of Stock ($1,305) ($1,422) ($951) ($1,291) ($1,047) ($1,047) ($1,047) ($1,047)

Redeemable noncontrolling interests $0 ($3) ($590) $0 $0 $0 $0 $0

Proceeds from stock option exercises $73 $44 $6 $0 $0 $0 $0 $0

Excess Tax Benefits from Equity-Based Comp $0 $0 $0 $0 $0 $0 $0 $0

Other Financing Activities, Net ($19) ($16) ($42) $0 $0 $0 $0 $0

Cash (used in) provided by financing activities ($85) ($734) ($902) ($1,240) ($1,437) ($1,563) ($1,067) ($1,047)

Effect of Exchange Rate Changes on Cash & Cash Eq ($6) ($57) ($51) $0 $0 $0 $0 $0

Net Increase in Cash ($793) ($41) $23 $110 $0 $0 $439 $445

Cash & Equiv. of Continuing Ops at Beg. Of Year $1,201 $408 $367 $390 $500 $500 $500 $939

Cash & Equiv. at End Of Year $408 $367 $390 $500 $500 $500 $939 $1,384

10 January 2017


Figure 314: Discovery summary Balance Sheets 2013-2020E


Year to December 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

ASSETS

Cash & Equivalents $408 $367 $390 $500 $500 $500 $939 $1,384

Receivables, Net of Allowances $1,371 $1,433 $1,479 $1,527 $1,639 $1,803 $1,818 $1,937

Content Rights, Net $277 $329 $313 $334 $389 $446 $482 $556


Prepaid Expenses and other current assets $281 $275 $346 $351 $390 $426 $438 $482


Noncurrent Content Rights, Net $1,883 $1,973 $2,030 $2,145 $2,121 $2,047 $1,989 $1,891

Property and Equipment, Net $514 $554 $488 $477 $475 $477 $492 $512

Goodwill $7,341 $8,236 $8,164 $8,164 $8,164 $8,164 $8,164 $8,164

Intangible Assets, Net $1,565 $1,971 $1,730 $1,549 $1,378 $1,217 $1,060 $908

Equity Method Investments $1,087 $644 $567 $507 $507 $507 $507 $507

Other Noncurrent Assets $179 $101 $289 $295 $313 $341 $341 $359

Total Assets $14,979 $15,970 $15,864 $15,918 $15,949 $16,010 $16,310 $16,785


Accounts Payable $141 $225 $282 $286 $318 $347 $357 $393

Accrued Liabilities $992 $1,094 $988 $1,003 $1,113 $1,217 $1,252 $1,376

Deferred Revenues $144 $178 $190 $194 $206 $224 $224 $236

Current Portion of Share-Based Compensation Liabilities $0 $0 $0 $0 $0 $0 $0 $0

Current Portion of Long-tern debt $17 $1,107 $119 $0 $0 $0 $0 $0

Other Current Liabilities $0 $0 $0 $0 $0 $0 $0 $0


Long Term Debt $6,482 $6,002 $7,616 $8,286 $7,396 $6,880 $6,360 $5,060


Other Noncurrent Liabilities $333 $425 $421 $2 $562 $613 $1,160 $2,524


Commitments & Contingencies $0 $0 $0 $0 $0 $0 $0 $0

Redeemable Interest in Subsidiaries $36 $747 $241 $241 $241 $241 $241 $241

Stockholders Equity

Equity Attributable to Discovery Communications, Inc. $6,196 $5,602 $5,451 $5,338 $5,511 $5,830 $6,062 $6,264

Equity Attributable to Non Controlling Interests $1 $2 $0 $0 $0 $0 $0 $0

Total Equity $6,197 $5,604 $5,451 $5,338 $5,511 $5,830 $6,062 $6,264

Total Liabilities, Redeemable Interests in Subsidiaries, and

Stockholders Equity $14,979 $15,970 $15,864 $15,918 $15,949 $16,010 $16,310 $16,785

10 January 2017


Key Charts

Figure 315: DISCA Adj. OIBDA mix 2016E Figure 316: DISCA revenue by type 2008-17E


Figure 317: DISCA revenue mix 2008-17E Figure 318: US Networks revenue trend 2008-17E


Figure 319: Int'l Networks revenue trend 2009-17E Figure 320: Int'l Networks OIBDA margins 2009-17E


U.S. Networks68%

International Networks32%

Education & Other0%

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E

Distribution Revenue Advertising Revenue Other Revenue

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E

U.S. Networks International Networks Education & Other

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E

U.S. Distribution Revenue U.S. Ad Revenue Other Revenue

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

2009 2010 2011 2012 2013 2014 2015 2016E 2017E

International distribution revenue International advertising revenue International other revenue

-10%

0%

10%

20%

30%

40%

50%

2009 2010 2011 2012 2013 2014 2015 2016E 2017E

EBITDA margin ex SBS, Eurosport EBITDA margin SBS EBITDA margin Eurosport

10 January 2017


Segment LTM OIBDA and margins

Figure 321: US Networks LTM OIBDA Figure 322: US Networks LTM OIBDA margin


Figure 323: Int'l Networks LTM OIBDA Figure 324: Int'l Networks LTM OIBDA margin


Figure 325: Education & Other LTM OIBDA Figure 326: Education & Other LTM OIBDA margin


$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

U.S. Networks

U.S. Networks

55%

56%

56%

57%

57%

58%

58%

59%

59%

60%

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

U.S. Networks

U.S. Networks

$0

$200

$400

$600

$800

$1,000

$1,200

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

International Networks


0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%3Q

09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16



($15)

($10)

($5)

$0

$5

$10

$15

$20

$25

$30

$35

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

Education & Other

Education & Other

-10%

-5%

0%

5%

10%

15%

20%

25%

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

Education & Other

Education & Other

10 January 2017



21st Century Fox Inc. (FOXA) Rating OUTPERFORM Price (06-Jan-17, US$) 29.52 Target price (12-mth, US$) (from 34.00) 37.00 52-week price range 31.06 - 23.57 Market cap (US$ m) 53,922.16 *Stock ratings are relative to the coverage universe in each



Research Analysts

Omar Sheikh

212 325 6818

[email protected]


212 538 8442

[email protected]

Boyao Sun

212 325 3494

[email protected]

FOCUS LIST STOCK

Valuation discount to unwind

■ Upgrade TP to $37: We upgrade our TP to $37 (previously $34), to reflect a

higher core multiple (9.5x 2017 EV/EBITDA) and a higher value for the Sky

stake. With industry trends improving and the risk of M&A outside the core

business now off the table, we see the steep valuation discount to peers

unwinding. The stock remains our top pick in US Media/Cable.

■ M&A risk off the table: The biggest driver of FOXA's valuation discount has

been the risk that M&A would increase the "conglomerate" structure of the

company. We think the proposed acquisition of an additional 61% of Sky will

remove this risk for 2-3 years and, together with 15% EPS accretion in 2018,

this should drive a revaluation of FOXA's equity.

■ Industry trends more constructive, Hulu stake will remain in focus: The

launch of "virtual" MVPDs will be constructive for industry subscriber trends,

in our view. As a 30% shareholder in Hulu – potentially the most attractive of

this distributor category – FOXA stands to benefit more than peers, and is in

a strong position to drive the current wave of innovation in the industry.

■ Earnings risks now look modest: We are now more confident that the risk

of negative earnings revisions for 2017/18 looks modest, with the tailwind

from domestic affiliate renewals likely to outweigh risks from the studio and

from investment in Hulu. With zero EBITDA growth for Filmed Entertainment

and $220m for FOXA's share of Hulu losses baked into our numbers for

2017, we argue our overall growth expectations (7%/10%/15% pa

EBITDA/FCF/EPS growth in 2016-18) may be conservative.

■ Valuation: FOXA trades at average headlines multiples (9.5x 2017

EV/EBITDA, P/E 15.3x), but stripping out the stakes in Sky, Hulu, STAR India

and Shine Endemol at a combined valuation of $20bn, "core" FOXA trades at

7.6x 2017 EV/EBITDA, a 17% discount to peers trading on 9.2x.



Daily Jan08, 2016 - Jan06, 2017, 01/08/16 = US$25.89



Year 6/16A 6/17E 6/18E 6/19E EPS (CS adj.) (US$) 1.66 1.93 2.19 2.77 Prev. EPS (US$) - 1.92 - - P/E (x) 17.8 15.3 13.5 10.7 P/E rel. (%) 91.1 79.4 78.0 69.1 Revenue (US$ m) 27,326.0 29,326.9 31,361.9 32,588.2 EBITDA (US$ m) 6,597.0 7,227.7 7,617.2 8,495.6 OCFPS (US$) 1.57 2.41 2.12 2.45 P/OCF (x) 17.3 12.2 13.9 12.0 EV/EBITDA (current) 10.5 9.5 8.9 7.9 Net debt (US$ m) 15,301 14,572 13,981 13,321 ROIC (%) 14.19 14.78 15.21 16.43

Number of shares (m) 1,826.63 IC (current, US$ m) 30,734.00 BV/share (Next Qtr., US$) - EV/IC (x) - Net debt (Next Qtr., US$ m) - Dividend (current, US$) - Net debt/tot eq (Next Qtr.,%) - Dividend yield (%) - Source: Company data, Thomson Reuters, Credit Suisse estimates

10 January 2017


What's changed?

■ We increase our SOTP-based TP to $37 (previously $34), to reflect (i) a higher multiple

for the "core" business (ex Sky, Hulu, STAR India, and Shine Endemol), given

improving structural trends in the industry; and (ii) a higher mark-to-market price for the

39% stake in Sky.

■ We outline our SOTP valuation and our financial forecasts below.

Valuation

We value FOXA at $37, based on our SOTP valuation (see Figure 329), which values

"core" Fox at 9.5x 2017 EV/EBITDA. Our Blue Sky valuation is $42, based on 11.0x core

Fox 2017 EV/EBITDA. Our Grey Sky valuation is $27, based on 7.0x core Fox 2017

multiple (see Figure 331).

Figure 327: 21st

Century Fox 12m forward

EV/EBITDA Figure 328: 21st

Century Fox 12m forward P/E


Figure 329: 21st

Century Fox SOTP valuation


0x

2x

4x

6x

8x

10x

12x

14x

1/8/2007 1/8/2008 1/8/2009 1/8/2010 1/8/2011 1/8/2012 1/8/2013 1/8/2014 1/8/2015 1/8/2016

FOXA 12m fwd EV/EBITDA

0x

5x

10x

15x

20x

25x

1/8/2007 1/8/2008 1/8/2009 1/8/2010 1/8/2011 1/8/2012 1/8/2013 1/8/2014 1/8/2015 1/8/2016

FOXA 12m fwd PE

($m) Value - 21CF % - 21CF Value - 100% Notes

Sky $8,127 39% $20,774 672.9m shares at £9.90, $/£ 1.23

+ Hulu $1,749 30% $5,830 Implied valuation for TWX valuation, implies 3.5x 2020 EV/EBITDA

+ STAR India $8,512 100% $8,512 See model - $965m EBITDA by 2020, 12x EV/EBITDA, 8% discount rate to PV

+ Shine Endemol $1,500 50% $3,000 $250m 2017 EBITDA, 12x EV/EBITDA

= Sub-total $19,888

+ "Core" 21CF $65,268 100% $65,268 ($7.2bn 2017 EBITDA minus $357m Star India EBITDA) * 9.5x EV/EBITDA

= Total EV $85,157

- Net debt ($15,301) 2016 year end

- Minorities ($1,772) National Geographic (27%); YES Network (20%); Big Ten Network (49%)

= Equity value $68,084

/ shares (m) 1,863 Q1 2017 diluted share count (1,064m A Shares, 799 B Shares)

Equity value per share $37

10 January 2017


Figure 330: 21st

Century Fox SOTP valuation (share of target EV)


Figure 331: 21st

Century Fox Blue and Grey Sky valuations


Our long term view

■ We are bullish on FOXA due to (1) the removal of M&A risk following the proposed

acquisition of an additional 61% of Sky; (2) the significant growth opportunity at Hulu

and STAR India, two assets we believe are misunderstood by investors; (3) Fox's

sports exposure to the NFL and MLB; and (4) Fox's compelling SOTP valuation, where

we value FOX shares at $37 based on stakes in Hulu ($1.75bn), STAR India ($8.5bn),

Sky ($8.1bn), Shine-Endemol ($1.5bn) and a value for core Fox at 9.5x fiscal 2017

EV/EBITDA, in line with peers.

Long term model assumptions

■ For domestic Cable Networks, we assume annual subscriber declines of 1%, offset by

12% annual per-sub affiliate fee growth in 2017 at most networks, and 6-7% in 2018-

20. We forecast advertising revenue growth of 5.6% in 2017, and c5.4% in 2018-20.

We expect cost growth of 9.9% in 2017, and c3%-4.5% in 2018-20, resulting in

EBITDA margins of 36.7% in 2017 expanding to 39.8% by 2020.

■ For Television, we forecast Fox Broadcast advertising growth of 13% in 2017, (9%) in

2018, and c2% in 2019-20. This is offset by c12% cost growth in 2017, (3.4)% in 2018,

and 2.2% in 2019-20, resulting in EBITDA margins of 15.6% in 2017, 13.8% in 2018,

and expansion to 15.7% by 2020.

Sky9% Hulu

2% STAR India10%

Shine Endemol2%

"Core" 21CF77%

Blue Sky Grey Sky

Fox EBITDA $6,904 Fox EBITDA $6,837

Fox Multiple 11.0 x Fox Multiple 7.0 x

Fox Valuation $75,942 Fox Valuation $47,858

Other Assets $19,888 Other Assets $19,888

Total EV $95,830 Total EV $67,747

-Net Debt ($15,301) -Net Debt ($15,301)

-Minorities ($1,772) -Minorities ($1,772)

=Equity Value $78,757 =Equity Value $50,674

/shares (m) 1,863 /shares (m) 1,863

Share Price $42 Share Price $27

10 January 2017


■ For Film, we assume (11%) theatrical revenue growth in 2017, 24% in 2018, (8%) in

2019, and 10% in 2020, resulting in EBITDA margins of 12.7% in 2017 moderating to

10.6% by 2020.

Figure 332: 21st

Century Fox summary Income Statements 2013-2020E


Year to June 2013 2014 2015 2016 2017E 2018E 2019E 2020E CAGR

Jun. Jun. Jun. Jun. Jun. Jun. Jun. Jun. '16-'20E

Revenues

Cable Network Programming $10,881 $12,273 $13,773 $15,029 $16,242 $17,447 $18,790 $20,256 7.7%

Television $4,860 $5,296 $4,895 $5,105 $5,783 $5,473 $5,647 $5,848 3.5%

Filmed Entertainment $8,642 $9,679 $9,525 $8,505 $8,548 $9,701 $9,423 $10,044 4.2%

Overhead/Other, Corporate and Eliminations ($1,147) ($1,186) ($1,241) ($1,313) ($1,246) ($1,259) ($1,271) ($1,284) (0.6)%

Total Revenue $27,675 $26,062 $26,952 $27,326 $29,327 $31,362 $32,588 $34,865 6.3%

Operating Costs


Television $4,005 $4,414 $4,177 $4,361 $4,882 $4,718 $4,823 $4,930 3.1%

Filmed Entertainment $7,334 $8,321 $8,080 $7,420 $7,460 $8,646 $8,329 $8,976 4.9%

Direct Broadcast Satellite TV $4,042 $0 $0 $0 $0 $0 $0 $0

Overhead/Other, Corporate and Eliminations ($671) ($830) ($918) ($936) ($865) ($866) ($867) ($868) (1.9)%

Total Operating Costs $21,414 $19,771 $20,464 $20,729 $22,099 $23,745 $24,093 $25,418 5.2%

Segment OIBDA


Television $855 $882 $718 $744 $901 $754 $824 $918 5.4%

Filmed Entertainment $1,308 $1,358 $1,445 $1,085 $1,089 $1,055 $1,094 $1,068 (0.4)%

Overhead/Other, Corporate and Eliminations ($476) ($356) ($323) ($377) ($381) ($392) ($404) ($416) 2.5%

Total Segment OIBDA $6,261 $6,291 $6,488 $6,597 $7,228 $7,617 $8,496 $9,447 9.4%

Revenue $27,675 $26,062 $26,952 $27,326 $29,327 $31,362 $32,588 $34,865 6.3%

Operating Expenses $21,414 $19,771 $20,464 $20,729 $22,099 $23,745 $24,093 $25,418 5.2%

Segment OIBDA $6,261 $6,291 $6,488 $6,597 $7,228 $7,617 $8,496 $9,447 9.4%

Depreciation & Amortization $797 $485 $534 $530 $539 $548 $557 $566 1.7%

Amort of Cable Investments $89 $85 $80 $75 $75 $75 $75 $75 0.0%

Segment Operating Income $5,375 $5,721 $5,874 $5,992 $6,614 $6,994 $7,864 $8,805 10.1%

Impairment and Restructuring Charges ($35) $0 $0 $0 $0 $0 $0 $0

Equity Earnings (Losses) of Affiliates $655 $622 $904 ($34) $166 $428 $838 $1,070

Interest Expense, Net ($1,006) ($1,095) ($1,159) ($1,146) ($1,128) ($1,228) ($1,228) ($1,228) 1.7%

Other, Net $3,747 $174 $4,196 ($658) ($148) $0 $0 $0

Income Before Taxes $8,736 $5,422 $9,815 $4,154 $5,504 $6,194 $7,473 $8,647 20.1%

Income Tax (Expense) Benefit ($1,690) ($1,272) ($1,243) ($1,130) ($1,816) ($2,106) ($2,616) ($3,026) 27.9%

Income from Cont'd Operations $7,046 $4,150 $8,572 $3,024 $3,687 $4,088 $4,858 $5,620 16.8%

(Loss) Inc. on Disc. Ops., Net of Tax $277 $729 ($67) ($8) ($6) $0 $0 $0

Net Income $7,323 $4,879 $8,505 $3,016 $3,681 $4,088 $4,858 $5,620 16.8%

Net Inc. Attrib. to Noncontrolling Interests ($226) ($132) ($231) ($261) ($300) ($300) ($300) ($300) 3.5%

Net Inc. Attrib. to FOXA Stockholders $7,097 $4,747 $8,274 $2,755 $3,381 $3,788 $4,558 $5,320 17.9%

One Time Items ($3,639) ($264) ($4,705) $466 $115 $0 $0 $0

Adj Net Income $3,181 $3,754 $3,636 $3,229 $3,502 $3,788 $4,558 $5,320 13.3%

Reported Net Income 6,820 4,018 8,341 2,763 3,387 3,788 4,558 5,320

Diluted Shares Outstanding 2,341 2,269 2,130 1,945 1,814 1,728 1,647 1,559 (5.4)%

Diluted Adj EPS $1.36 $1.65 $1.71 $1.66 $1.93 $2.19 $2.77 $3.41 19.7%

10 January 2017


Figure 333: 21st

Century Fox summary Cash Flow Statements 2013-2020E


Year to June 2013 2014 2015 2016 2017E 2018E 2019E 2020E


Income from Continuing Operations $7,046 $4,150 $8,572 $3,024 $3,687 $4,088 $4,858 $5,620

Depreciation and Amortization $797 $485 $534 $530 $539 $548 $557 $566

Amortization of Cable Distribution Investments $89 $85 $80 $75 $75 $75 $75 $75

Equity (Earnings) Losses of Affiliates, Net ($655) ($622) ($904) $34 ($166) ($428) ($838) ($1,070)

Cash Distributions Received from Affiliates $324 $358 $352 $351 $351 $351 $351 $351

Impairment Charges, Net of Tax $35 $0 $0 $0 $0 $0 $0 $0

Other, Net ($3,760) ($84) ($3,942) $900 $0 $0 $0 $0

Change in Operating Assets and Liabilities ($874) ($1,832) ($1,309) ($1,866) ($111) ($977) ($967) ($1,197)

Net Cash Provided by Operating Activities $3,002 $2,540 $3,383 $3,048 $4,375 $3,658 $4,036 $4,346


Property, Plant and Equipment ($622) ($310) ($329) ($263) ($270) ($275) ($280) ($286)

Acquisitions, Net of Cash Acquired ($606) ($692) ($142) ($916) $0 $0 $0 $0

Investments in Associated Entities ($502) ($19) ($1,249) ($182) $39 $39 $39 $40

Other Investments ($152) ($64) ($76) ($277) $0 $0 $0 $0

Proceeds from Dispositions $1,968 $518 $8,627 $0 $0 $0 $0 $0

Net Cash (Used In) Provided by Investing Activities $86 ($567) $6,831 ($1,638) ($231) ($236) ($241) ($246)

Cash Flow From Continuing Operations After Investing Activities $3,088 $1,973 $10,214 $1,410 $4,144 $3,422 $3,795 $4,100


Borrowings $1,277 $1,155 $3,161 $1,360 $69 $0 $0 $0

Repayment of Borrowings ($754) ($296) ($2,845) ($687) $0 $0 $0 $0

Issuance of Shares $203 $66 $51 $12 $0 $0 $0 $0

Repurchase of Shares ($2,026) ($3,772) ($5,939) ($4,904) ($2,762) ($2,208) ($2,483) ($2,705)

Dividends Paid ($613) ($792) ($878) ($821) ($653) ($622) ($652) ($679)

Purchase of Subsidiary Shares from Noncontrolling Interests ($163) ($127) ($652) ($290) $0 $0 $0 $0

Sale of Subsidiary Shares to Noncontrolling Interests $93 $0 $0 $0 $0 $0 $0 $0

Payment to New News Corp ($2,588) ($10) $0 $0 $0 $0 $0 $0

Net Cash Provided by (Used In) Financing Activities ($4,571) ($3,776) ($7,102) ($5,330) ($3,346) ($2,831) ($3,135) ($3,384)

Net (Decrease) Increase in Cash from Discontinued Operations ($1,431) $571 ($49) $175 $0 $0 $0 $0

Net Increase (Decrease) in Cash ($2,914) ($1,232) $3,063 ($3,745) $798 $591 $660 $716

Cash beginning of year $9,626 $6,659 $5,359 $8,233 $4,424 $5,222 $5,813 $6,473

Exchange Movement of Opening Cash Balance ($53) ($68) ($189) ($64) $0 $0 $0 $0

Cash End of Year $6,659 $5,359 $8,233 $4,424 $5,222 $5,813 $6,473 $7,190

10 January 2017


Figure 334: 21st

Century Fox summary Balance Sheets 2013-2020E


Year to June 2013 2014 2015 2016 2017E 2018E 2019E 2020E

ASSETS

Cash and Cash Equivalents $6,659 $5,359 $8,233 $4,424 $5,222 $5,813 $6,473 $7,190

Receivables, Net $5,459 $6,468 $5,912 $6,258 $6,672 $7,135 $7,414 $7,932

Inventories, Net $2,784 $3,092 $2,749 $3,291 $3,536 $4,037 $4,337 $4,829

Other $665 $401 $287 $976 $451 $483 $501 $536


Receivables $437 $454 $394 $389 $511 $546 $568 $607

Investments $3,704 $2,859 $4,529 $3,863 $3,902 $3,941 $3,980 $4,020

Inventories, Net $5,371 $6,442 $6,411 $7,041 $7,557 $8,081 $8,397 $8,983

Property, Plant and Equipment, Net $2,829 $2,931 $1,722 $1,692 $1,778 $1,850 $1,916 $1,979

Intangible Assets, Net $5,064 $8,072 $6,320 $6,777 $6,422 $6,077 $5,734 $5,391

Goodwill $17,255 $18,052 $12,513 $12,733 $12,733 $12,733 $12,733 $12,733

Other Non-Current Assets $717 $663 $981 $921 $0 $0 $0 $0

Total Non-Current Assets $35,377 $39,473 $32,870 $33,416 $32,902 $33,228 $33,328 $33,713

Total Assets $50,944 $54,793 $50,051 $48,365 $48,783 $50,695 $52,053 $54,200


Borrowings $137 $799 $244 $427 $0 $0 $0 $0

Accounts Payable, Accrued Expens and Other Current Liabilities $4,434 $4,183 $3,937 $3,181 $2,983 $2,731 $2,289 $1,906

Participations, Residuals and Royalies Payable $1,663 $1,546 $1,632 $1,672 $1,768 $1,900 $1,927 $2,033

Program Rights Payable $1,524 $1,638 $1,001 $1,283 $1,326 $1,425 $1,446 $1,525

Deferred Revenue $677 $690 $448 $505 $587 $627 $652 $697


Borrowings $16,321 $18,259 $18,795 $19,298 $19,794 $19,794 $19,794 $19,794

Other Liabilities $3,264 $3,507 $3,105 $3,678 $4,032 $4,968 $5,272 $5,635

Deferred Income Taxes $2,280 $2,729 $2,082 $2,888 $2,888 $2,888 $2,888 $2,888

Redeemable Noncontrolling Interests $519 $541 $621 $552 $552 $552 $552 $552

Commitments and Contingencies $0 $0 $0 $0 $0 $0 $0 $0

Total Non-Current Liabilities $21,865 $24,495 $23,982 $25,864 $26,714 $27,650 $27,954 $28,317


Equity

Class A Common Stock, $0.01 Par Value $15 $14 $12 $11 $11 $11 $11 $11

Class B Common Stock, $0.01 Par Value $8 $8 $8 $8 $8 $8 $8 $8

Additional Paid-In Capital $15,840 $15,041 $13,427 $12,211 $12,211 $12,211 $12,211 $12,211

Retained Earnings and Accumulated Other Comprehensive Income $1,135 $2,355 $3,773 $1,431 $1,403 $2,361 $3,783 $5,720

Total FOXA Stockholders Equity $16,998 $17,418 $17,220 $13,661 $13,633 $14,591 $16,013 $17,950

Noncontrolling Interests $3,127 $3,483 $966 $1,220 $1,220 $1,220 $1,220 $1,220

Total Equity $20,644 $21,442 $18,807 $15,433 $15,405 $16,363 $17,785 $19,722

Total Liabilities and Shareholders' Equity $50,944 $54,793 $50,051 $48,365 $48,783 $50,695 $52,053 $54,200

10 January 2017


Key Charts

Figure 335: Fox Operating Income 2017E Figure 336: Fox Cable Networks Revenue 2009-17E


Figure 337: Fox Cable Networks EBITDA 2009-17E Figure 338: Fox Broadcasting Revenue 2010-17E


Figure 339: Fox Net Debt/EBITDA 2010-17E

Figure 340: Fox Filmed Entertainment EBITDA

margins



75%Television11%


$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000


US revenue International revenue

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000


US Cable Networks EBITDA International Cable Networks EBITDA

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

2010 2011 2012 2013 2014 2015 2016 2017E

FBC Ad Revenue O&O Ad Revenue Retrans Revenue Other & MyNetwork TV

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

2010 2011 2012 2013 2014 2015 2016 2017E

Net Leverage

0%

5%

10%

15%

20%

25%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E

Filmed Entertainment EBITDA margins %

10 January 2017


Segment LTM EBITDA and margins

Figure 341: Fox LTM Segment OIBDA Figure 342: Fox LTM Segment OIBDA margins


Figure 343: Fox LTM Cable Networks OIBDA

Figure 344: Fox LTM Cable Networks OIBDA

margins


Figure 345: Fox LTM Television OIBDA Figure 346: Fox LTM Television OIBDA margins


$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

Total Segment OIBDA

Total Segment OIBDA

0%

5%

10%

15%

20%

25%

30%

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

Total Segment OIBDA margin

Total Segment OIBDA margin

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17



20%

22%

24%

26%

28%

30%

32%

34%

36%

38%

40%

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17



$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

Television

Television

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

Television

Television

10 January 2017


Figure 347: Fox LTM Filmed Entertainment OIBDA

Figure 348: Fox LTM Filmed Entertainment OIBDA

margins


$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

Filmed Entertainment


0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17



10 January 2017


Companies Mentioned (Price as of 06-Jan-2017) 21st Century Fox Inc. (FOXA.OQ, $29.52, OUTPERFORM, TP $37.0) AMC Entertainment Holdings (AMC.N, $33.8) AMC Networks (AMCX.OQ, $55.27) AT&T (T.N, $41.32) Alphabet (GOOGL.OQ, $825.21) Altice (ATCA.AS, €18.9) Amazon com Inc. (AMZN.OQ, $795.99) Apple Inc (AAPL.OQ, $117.91) CBS Corporation (CBS.N, $64.29) Charter Communications Inc. (CHTR.OQ, $298.16) Cinemark Holdings, Inc (CNK.N, $40.36) Comcast Corporation Inc. (CMCSA.OQ, $70.27) DISH Network Corporation (DISH.OQ, $61.36) Dentsu (4324.T, ¥5,640) DirecTV (DTV.OQ^G15) DirecTV (DTV.OQ^G15) DirecTV (DTV.OQ^G15) Discovery Communications (DISCA.OQ, $27.48, UNDERPERFORM, TP $23.0) Facebook Inc. (FB.OQ, $123.41) IMAX Corp (IMAX.N, $32.05) Interpublic Group (IPG.N, $23.64) Lions Gate Ent (LGFa.N, $27.54) Manchester United Plc (MANU.N, $15.8) National CineMedia (NCMI.OQ, $14.8) Netflix, Inc. (NFLX.OQ, $131.07, NEUTRAL[V], TP $130.0) News Corporation (NWS.AX, A$16.83) Omnicom Group Inc. (OMC.N, $85.81) Publicis Groupe SA (PUBP.PA, €67.05) Regal Entertainment Group (RGC.N, $21.76) Scripps Net Int (SNI.OQ, $74.38) Sky Plc (SKYB.L, 991.0p) Sony (6758.T, ¥3,316) Tegna (TGNA.N, $21.5) The Walt Disney Company (DIS.N, $108.98, OUTPERFORM, TP $125.0) Time Warner Inc. (TWX.N, $94.75) Verizon Communications Inc (VZ.N, $53.26) Viacom Inc. (VIAB.OQ, $37.79) WPP (WPP.L, 1840.0p) Yahoo Inc. (YHOO.OQ, $41.23)

Disclosure Appendix

Analyst Certification I, Omar Sheikh, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for 21st Century Fox Inc. (FOXA.OQ)

FOXA.OQ Closing Price Target Price

Date (US$) (US$) Rating

14-Jan-14 32.30 40.00 O

03-Mar-14 33.06 NR

02-Jun-15 33.40 40.00 O *

14-Sep-15 26.32 35.00

18-Nov-15 30.30 34.00

06-Jan-16 26.72 38.00

09-Feb-16 24.14 37.00

23-May-16 28.19 40.00

25-Jul-16 26.85 38.00

04-Aug-16 25.59 33.00

07-Nov-16 27.39 34.00

* Asterisk signifies initiation or assumption of coverage.

O U T PERFO RM

N O T RA T ED

10 January 2017


3-Year Price and Rating History for Discovery Communications (DISCA.OQ)

DISCA.OQ Closing Price Target Price


03-Mar-14 41.93 NR

02-Jun-15 33.95 31.00 N *

14-Sep-15 26.57 25.00

04-Nov-15 30.30 29.00

03-Mar-16 27.63 25.00


N O T RA T ED

N EU T RA L

3-Year Price and Rating History for Netflix, Inc. (NFLX.OQ)

NFLX.OQ Closing Price Target Price


23-Jan-14 55.53 49.86 N

22-Apr-14 53.27 52.71

22-Jul-14 61.58 61.43

16-Oct-14 51.67 56.29

14-Jan-15 46.32 61.71

21-Jan-15 58.47 59.57

14-Apr-15 68.39 65.86

16-Apr-15 80.29 72.14

10-Jul-15 97.23 100.00

16-Jul-15 115.81 110.00

09-Oct-15 113.33 130.00

15-Oct-15 101.09 124.00

12-Jan-16 116.58 119.00

20-Jan-16 107.74 126.00

18-Apr-16 108.40 127.00

19-Apr-16 94.34 116.00

15-Jul-16 98.39 119.00

19-Jul-16 85.84 122.00

17-Oct-16 99.80 132.00

18-Oct-16 118.79 130.00


N EU T RA L

3-Year Price and Rating History for The Walt Disney Company (DIS.N)

DIS.N Closing Price Target Price


06-Feb-14 75.56 80.00 O

03-Mar-14 79.46 NR

02-Jun-15 110.75 130.00 O *

10-Aug-15 111.00 120.00

10-Nov-15 117.42 130.00

11-May-16 102.29 128.00

27-Oct-16 94.02 125.00


O U T PERFO RM

N O T RA T ED

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

10 January 2017


As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least at tractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractivene ss of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7 .5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 45% (64% banking clients) Neutral/Hold* 38% (59% banking clients) Underperform/Sell* 15% (53% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.

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Target Price and Rating Valuation Methodology and Risks: (12 months) for 21st Century Fox Inc. (FOXA.OQ)

Method: Our Outperform rating and $37 target price for Fox are based on a SOTP methodology, which values the stakes in Sky, Hulu, Shine/Endemol and STAR India separately at a combined $20bn.

Risk: Key risks to our $37 Price Target and Outperform rating are: (1) exposure to TV advertising which comprises just under 30% of revenue, (2) limited visibility on consumer preferences, which drive ratings, (3) foreign currency risk given over one-third of revenues are outside of the US, and (4) potential failure of one or more movies on the upcoming slate.

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Target Price and Rating Valuation Methodology and Risks: (12 months) for Discovery Communications (DISCA.OQ)

Method: Our $23 target price for Discovery values the company at 9x 2017 EV/EBITDA, and our Underperform rating is warranted by our cautious view on the stock given the strutural challenges of its networks and high international exposure. Our target price and Underperform rating are confirmed by our discounted cash flow valuation, which uses a 0.6% terminal growth rate and a WACC of 8.5%.

Risk: Risks to our $23 target price and Underperform rating for Discovery are: (1) high exposure (close to 50% of revenues) to advertising which is highly cyclical, (2) limited visibility of consumer preferences and in turn, ratings, (3) high (close to 50% of revenues) exposure to international currency swings, (4) overhang of John C. Malone's stake, and (5) cord-cutting impacts on affiliate fees.

Target Price and Rating Valuation Methodology and Risks: (12 months) for Netflix, Inc. (NFLX.OQ)

Method: Our $130 target price for Netflix is calculated using discounted cash flow. We use a 3% terminal growth rate, a 11.5% weighted average cost of capital. We maintain our Neutral stance primarily on valuation and factors which can get us to change our stance include: 1) Faster-than-expected realization of target operating margins both domestically and Internationally, 2) Acceleration of consumer adoption especially in International markets due to the proliferation of connected devices, 3) Moderation of content spends due to traction of its original programming.

Risk: Risks to our $130 target price and Neutral rating for Netflix shares include the following factors: 1) Slower-than-expected rate of consumer adoption in any of the launched regions, 2) Faster-than-expected adoption of competitive offerings, 3) As Netflix becomes more global in its reach, the strengthening of the USD versus major currencies can also exert a headwind.

Target Price and Rating Valuation Methodology and Risks: (12 months) for The Walt Disney Company (DIS.N)

Method: Our $125 target price for Disney is 12.3x our 2017E EBITDA, and is supported by the strength of the movie slate and the recent launch of Shanghai Disney. Our target price and Outperform rating are supported by our discounted cash flow valuation, which uses a 2% terminal growth rate and a WACC of 7.3%.

Risk: Risks to our $125 target price and Outperform rating for Disney are (1) failure of key movie properties, including the new Star Wars movies and spin-offs to perform in line with our expectations; (2) failure of Shanghai Disney to meet our atttendance expectations; (3) higher than expected acceleration of cord-cutting/shaving.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names The subject company (FOXA.OQ, DISCA.OQ, DIS.N, SKYB.L, OMC.N, WPP.L, PUBP.PA, 6758.T, ATCA.AS, VZ.N, AMZN.OQ, GOOGL.OQ, FB.OQ, NWS.AX, T.N, AAPL.OQ, CHTR.OQ, TWX.N, VIAB.OQ, MANU.N, CMCSA.OQ, DISH.OQ, NCMI.OQ, AMC.N, RGC.N, CNK.N, CBS.N, DTV.OQ^G15, DTV.OQ^G15, DTV.OQ^G15) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (FOXA.OQ, DISCA.OQ, DIS.N, ATCA.AS, VZ.N, GOOGL.OQ, FB.OQ, T.N, AAPL.OQ, CHTR.OQ, TWX.N, CMCSA.OQ, DISH.OQ, NCMI.OQ, AMC.N, RGC.N, CBS.N, DTV.OQ^G15, DTV.OQ^G15, DTV.OQ^G15) within the past 12 months. Credit Suisse has managed or co-managed a public offering of securities for the subject company (DISCA.OQ, ATCA.AS, GOOGL.OQ, CHTR.OQ, TWX.N, CMCSA.OQ, AMC.N, CBS.N) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (FOXA.OQ, DISCA.OQ, DIS.N, ATCA.AS, VZ.N, GOOGL.OQ, FB.OQ, T.N, AAPL.OQ, CHTR.OQ, TWX.N, CMCSA.OQ, DISH.OQ, NCMI.OQ, AMC.N, RGC.N, CBS.N, DTV.OQ^G15, DTV.OQ^G15, DTV.OQ^G15) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (FOXA.OQ, DISCA.OQ, DIS.N, SKYB.L, OMC.N, IPG.N, WPP.L, PUBP.PA, 6758.T, ATCA.AS, YHOO.OQ, VZ.N, AMZN.OQ, GOOGL.OQ, FB.OQ, NWS.AX, T.N, AAPL.OQ, CHTR.OQ, TWX.N, VIAB.OQ, MANU.N, CMCSA.OQ, DISH.OQ, NCMI.OQ, AMC.N, RGC.N, CNK.N, CBS.N, IMAX.N, DTV.OQ^G15, DTV.OQ^G15, DTV.OQ^G15) within the next 3 months. As of the date of this report, Credit Suisse makes a market in the following subject companies (DTV.OQ^G15, DTV.OQ^G15, DTV.OQ^G15). As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (SKYB.L, TWX.N). Credit Suisse beneficially holds >0.5% long position of the total issued share capital of the subject company (GOOGL.OQ). Credit Suisse has a material conflict of interest with the subject company (FOXA.OQ) . “Tidjane Thiam, the CEO of Credit Suisse is a non-executive Director of 21st Century Fox Inc. (FOXA)” Credit Suisse has a material conflict of interest with the subject company (FB.OQ) . Credit Suisse has been named as a defendant in various putative shareholder class-action lawsuits relating to Facebook, Inc.’s May 2012 initial public offering. Credit Suisse’s practice is not to comment in research reports on pending litigations to which it is a party. Nothing in this report should be construed as an opinion on the merits or potential outcome of the lawsuits.

10 January 2017


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Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit-suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. The following disclosed European company/ies have estimates that comply with IFRS: (SKYB.L, WPP.L, PUBP.PA). Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (DISCA.OQ, DIS.N, ATCA.AS, VZ.N, GOOGL.OQ, T.N, AAPL.OQ, CHTR.OQ, TWX.N, CMCSA.OQ, AMC.N, RGC.N, CBS.N, DTV.OQ^G15, DTV.OQ^G15, DTV.OQ^G15) within the past 3 years. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. This research report is authored by: Credit Suisse Securities (USA) LLC ...................................................................................... Omar Sheikh ; Lawrence Dann-Fenwick ; Boyao Sun

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