Daekyo (019680) Rerating on the cards

Transcription

1 Daekyo (1968) Rerating on the cards * Daekyo is Korea s leading education services provider, offering a variety of learning programs targeted mainly at elementary school students and preschoolers. * Sales and operating profit should grow a respective.6% and 24.3% this year and 2.6% and 2.5% next year, backed by: 1) a slowing decline in the school-aged population; 2) impressive growth in Caihong sales; and 3) margins improving thanks to rising numbers of learning centers. Daekyo boast a bright medium-term earnings outlook thanks to structural improvement in profitability, while its overseas business promises growth over the long term. * We initiate coverage of Daekyo at BUY with a 12-month target price of KRW13,, (based on 24.5x P/E, a 2% premium to the 2.3x average of major global players targeting the same age groups). We believe Daekyo deserves to trade at a premium in light of strong demand for Chinese language education. With earnings gaining momentum on strong growth, we recommend accumulating shares. WHAT S THE STORY? Turnaround underway: After shrinking y-y for nine quarters running, consolidated sales at Daekyo finally grew in 2Q, rising.9% y-y. Then in 3Q, they crept up.2% y-y. The turnaround has been driven by a slowing decline in the school-aged population, and this should remain the driver. Korea s cohort of 5-9 year olds is important to Daekyo s Noonnoppi business (which contributes more than 7% of total sales), and it should hold steady for the next three to four years. For this reason, y-y declines in Daekyo s subscriptions should ease. Caihong and learning centers lifting profitability: Amid growing demand for Chinese language education and ARPU hikes enabled by growth in Daekyo s adult portion of subscribers, we forecast that Caihong sales will grow 19.2% y-y in 215 and 22.9% y-y in 216, helping operating margin rise from 7.2% in 214 to 1.5% in 217. At the Noonnoppi division, learning centers generate an operating margin more than 2%pts higher than the home-tutoring model does. The addition of more learning centers should continue to boost earnings through 217. Initiating coverage at BUY: We like Daekyo as its: 1) earnings should grow structurally in the medium term; 2) it offers a dividend payout ratio of over 4%; and 3) its overseas businesses boasts growth potential. We initiate coverage at BUY with a target price of KRW13, (based on 24.5x 216 P/E, 2% premium to the 2.3x average of major global players targeting the same age groups.) Believing shares will soon rerate, we advise investors to accumulate the stock.

2 Contents Valuation Turnaround underway We initiate coverage of Daekyo at BUY with a 12-month target price of KRW13,, (based on 24.5x P/E, a 2% premium to the 2.3x average of major global players targeting the same age groups). We believe Daekyo deserves to trade at a premium given that: 1) the domestic market for Chinese language education is growing; and 2) Daekyo s one-on-one education model appeals strongly to adult learners, and should drive up its share of the Chinese language education market from 9.2% in 215 to 12.3% in 217, and bolster ARPU. Daekyo shares have traded at an average of 18.6x over the past three years, when a declining schoolaged population has cut into sales and the firm has struggled with profitability. Things are changing, however. The school-aged population should now hold steady for the next three to four years, and Daekyo should enjoy structural growth in earnings thanks to rising Caihong and learning-center sales. Believing shares will soon rerate, we advise investors to accumulate the stock. Table 1. Valuation (KRW) 215E 216E Net profit attrib. to controlling shareholders Number of shares (adjusted) 14,13 14,13 EPS EPS growth (% y-y) Current share price 9,8 9,8 Current P/E (x) Target P/E (x) 24.5 Fair value 12,894.2 Target price 13, Upside (%) 43.2 Source: Samsung Securities estimates 2

3 Table 2. Global peers: Earnings and valuation matrix (USDm) Daekyo Woongjin Thinkbig Bright Horizon Family Solution TAL Education (ADR) G8 Education Average Code 1968 KS 1968 KS BFAM US XRS US GEM AU Country Korea Korea US China (ADR) Australia Market cap ,584. 2, Sales , E , E , Operating profit E E Net profit E E Operating margin (%) 215E E EPS growth (% y-y) 215E 1.3 (9.4) E P/E (x) E E P/B (x) E E ROE (%) E E EV/EBITDA (x) E E Source: Samsung Securities estimates Table 3. SWOT analysis Strengths - Market-share leader (18%) - Steady ARPU growth from Caihong expansion - Margin gains on growth in learning-center portion of sales - Losses at overseas business narrowing Opportunities - Chinese language demand growing well, Caihong learning model appeals to adult learners - Brand awareness overseas may improve faster than expected Source: Samsung Securities Weaknesses - High-margin learning center portion of sales likely limited at 6% - Home-tutorial subscriptions declining - Publishing industry sentiment weak Threats - Growth in Chinese language demand may slow - Losses at Sobics and publishing businesses may increase - Brand awareness overseas may improve more slowly than expected 3

4 Chart 1. Forward P/E band Chart 2. Forward P/B band (KRW) (KRW) 12, 23x 12, 1, 21x 19x 1, 1.4x 1.25x 8, 17x 15x 8, 1.1x.95x 6, 6,.8x 4, , Source: Samsung Securities estimates Source: Samsung Securities estimates Education peers: Earnings and valuation comparisons Table 4. Earnings: Daekyo vs Woongjin Thinkbig Sales Operating profit Operating margin (%) Net profit EPS growth (% y-y) 215E 216E 215E 216E 215E 216E 215E 216E 215E 216E Daekyo Woongjin Thinkbig (1.1) 5.2 Source: FnGuide, Samsung Securities estimates Table 5. Valuation: Daekyo vs Woongjin Thinkbig P/E (x) P/B (x) EV/EBITDA (x) ROE (%) EBITDA growth (% y-y) 215E 216E 215E 216E 215E 216E 215E 216E 215E 216E Daekyo Woongjin Thinkbig Source: FnGuide, Samsung Securities estimates 4

5 Table 6. Global education peers: Earnings and valuation comparisons Company Country Code Market cap (USDm) Targeting elementary school students/preschooler 214 sales (USDm) 214 operating profit (USDm 214 operating margin (%) 214 P/E (x) 214 P/B (x) 214 EV/EBITDA (x) Daekyo Korea 1968 KS Woongjin Thinkbig Korea 9572 KS Bright Horizons Family US BFAM US 2, Tal Education Group China (ADR) XRS US 2, , n/a (5.3) Benesse Holdings Japan 9783 JP 3, , G8 Education Australia GEM AU K12 Inc US LRN US Targeting middle/high school students Visang Education Korea 122 KS Kroton Educacional SA Brazil KROT3 BZ 4,37.6 1, Navitas Australia NVT AU 1, China Distance Education China (ADR) DL US Targeting university students/adults Credu Korea 6728 KS Megastudy* Korea 7287 KS Grand Canyon Education US LOPE US 1, , DeVry Education US DV US 1, , Estacio Participacoes SA Brazil ESTC3 BZ 1, Apollo Education US APOL US , Strayer Education US STRA US Capella Education US CPLA US Foreign language education JLS Korea 442 KS Chungdahm Learning Korea 9624 KS New Oriental Education China (ADR) EDU US 4,161. 1, Note: Numbers based on 214 or latest accounting year; * Megastudy earnings based on 214 before Apr 1, 215 split (into Megastudy and Megastudy Edu) Source: Bloomberg, Samsung Securities 214 ROE (%) 5

6 Contents Turnaround underway After shrinking y-y for nine quarters running, consolidated sales at Daekyo finally grew in 2Q, rising.9% y-y. Then in 3Q, they crept up.2% y-y. Likewise, operating profit growth turned positive this year and has stayed on an uptrend. Specifically, operating profit contracted 3.2% in 214, before surging 18.8% in 1Q15, 29.4% in 2Q15, and 27.6% in 3Q15. We expect operating profit growth to remain robust on the back of sales growing 2.3% in 216 and 2.9% in 217. The turnaround has been driven by: 1) a slowing decline in the school-aged population; 2) impressive growth in Caihong sales; and 3) margins improving thanks to rising numbers of learning centers. These factors should continue to drive the turnaround. Chart 3. Sales and growth Chart 4. Operating profit trends (% y-y) (% y-y) Growth (RHS) Operating margin (RHS) Growth (RHS) (3) 2 7 Sales (LHS) E 216E 217E (6) Operating profit(lhs) E 216E 217E (1) Decline in school-aged population slows The main culprit behind Daekyo s shrinking sales was the school-aged population shrinking. Between 2 and 26, the number of newborns in Korea tumbled 29.4% from 635, to 448,. This translated into a plunge in the number of new elementary school students over , and took a heavy toll on education materials providers targeting preschoolers and preteens. From 214, however, Korea s cohort of 5-9 year olds should remain flat for three to four years as should Daekyo s number of Noonnoppi subscriptions, which we estimate contracted 4.6% in 213 and.3% in

7 Chart 5. Growth: Korea s 5-9 year old cohort vs Noonnoppi subscriptions and sales (% y-y) 1 5 (5) (1) E 216E 217E 218E 219E 5-9year old cohost growth Noonnoppi subscription growth Noonnoppi sales growth Source: Statistics Korea, Company data, Samsung Securities estimates 3Q review: Solid earnings momentum confirmed Daekyo recently announced that consolidated sales and operating profit climbed.2% and 27.6% y-y, respectively, to KRW23b and KRW11.2b in 3Q (vs 1H growth of.3% and 24.1% h-h). The education services provider s operating margin also showed marked improvement, coming in at 5.5% (vs a 1H figure of 5.1%) thanks to: 1) a growing adult portion of subscribers to Caihong a one-on-one Chinese language tutoring service; 2) learning centers contributing more to Noonnoppi sales; and 3) a low base the firm s brand and company image overhaul cost KRW9m in 3Q14. More details on these factors are presented in the following chapters. Consolidated pre-tax profit plummeted 78.9% y-y to KRW7.7b in 3Q due to: 1) a high base the firm recognized proceeds from the sale of its.75m-share stake in Shinhan Financial Group for KRW28b; and 2) KRW2.7b in derivatives valuation losses. Net profit nosedived 81.8% y-y to KRW5b. Chart 6. Quarterly sales and growth Chart 7. Quarterly operating profit and margin 23 Growth (RHS) (% y-y) 3 15 Operating margin(rhs) (%) (3) 17 (6) Sales (LHS) 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 (9) Operating profit(lhs) 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 7

8 Table 7. Results and forecasts, by segment 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15E E 216E 217E Earnings summary Sales Gross profit Operating profit Pre-tax profit (9.3) Net profit (8.2) Margins (%) Gross profit Operating profit Pre-tax profit (4.6) Net profit (4.1) Chg (% y-y) Sales (2.2) (4.8) (5.) (1.9) (.3) (3.5) Gross profit 4.8 (5.7) (1.8) (.1) 11.5 (.) Operating profit (7.1) (11.1) (26.4) (3.2) Pre-tax profit (35.9) n/a (78.9) n/a (.7) Net profit (36.4) n/a (81.8) n/a Sales Total sales Daekyo (parent) Noonnoppi division Noonnoppi Caihong Media division Overseas Other Consolidated subsidiaries Chg (% y-y) Total sales (2.2) (4.8) (5.) (1.9) (.3) (3.5) Daekyo (parent) (.5) (2.2) (3.2) (.4) (1.6) Noonnoppi division (.6) (.7) (.5) (.3) Noonnoppi (.9) (1.) (.7) (.1) (.2) (.5) (.5).3 (.7) (.2) Caihong Media division (2.9) (16.2) (11.2) (5.6) (1.7) (7.7) (7.8) (2.5) (8.9) (4.7) (3.7) (2.8) Overseas (.3).1 (11.4) (12.1) (6.7) Other (54.) (16.) (18.2) Consolidated subsidiaries (15.8) (29.1) (2.1) (17.8) (12.8) 4.5 (5.2) (3.6) (2.6) (5.1) Portion of total sales (%) Total sales Daekyo (parent) Noonnoppi division Noonnoppi Caihong Media division Overseas Other Consolidated subsidiaries

9 Contents Caihong a competitive model in adult education Caihong sales growth accelerating Daekyo s Chinese language education business, Caihong, is serving as an explicit new growth engine, with sales ballooning 18.4% h-h in 1H15 and 19.3% y-y in 3Q15 after have grown a mediocre 2.8% in 213 and 5% in 214. Caihong s contribution to consolidated sales stood at just 5.7% in 214 and 6.6% in 1H15 (or 6.2% and 7.1% on a parent basis). However, that contribution should jump to 1% in 217 (or 1.8%), helped by: 1) steady growth in adult subscriber numbers; and 2) Caihong s competitive education model. Meanwhile, the Caihong business is set to add sales and earnings from administering Hanyu Shuiping Kaoshi (HSK) tests from next year. Chart 8. Caihong: Sales and growth Chart 9. Sales, by business 9 (% y-y) 3 (%) 1 Growth (RHS) E 216E 217E Sales(LHS) E 216E 217E Noonnoppi Media division Other Caihong Overseas sales Consolidated subsidiaries 9

10 ARPU rising on increase in adult subscribers; Caihong College losses shrinking We expect operating profit from Caihong to leap 45% from KRW3.3b in 214 to KRW4.9b in 215, and 37.1% to KRW6.7b in 216, while operating margin should rise from 7.2% in 214 to 1.5% in 217. We see two reasons for such profitability improvement. First, the business has seen ARPU rise thanks to growth in its adult portion of subscribers ie, from 23.4% in 3Q14 to 25.7% in 3Q15. This has lifted Caihong ARPU 8.6% from KRW14,7 to KRW113,7 over the same period. Meanwhile, the trend of subscribers taking more classes should drive ARPU higher than mere growth in the adult portion of subscribers. Second, losses from the offline institute business, Caihong College, are narrowing from KRW1.5b in 214, and should amount to KRW7m in 215 and KRW4m in 216 thanks to increasing enrollment. These two factors should continue to boost Caihong profitability. Chart 1. Caihong: Operating profit trends Chart 11. Caihong: Subscribers and ARPU 12 Growth (RHS) (% y-y) 6 (' people) 5 (KRW ') 12 9 Operating margin (RHS) 3 4 ARPU(RHS) Operating profit (LHS) E 216E 217E (3) (6) 3 2 Member (RHS) 1Q13 3Q13 1Q14 3Q14 1Q15 3Q Chart 12. Caihong: Subscriber breakdown, by age (3Q13) Chart 13. Caihong: Subscriber growth, by age (3Q13) Adults: 26% Preschoolers: 4% (% y-y) 3 2 High school students: 9% Middle school student 24% Elementary school students: 37% 1 Preschoolers Elementary school students Middle school students High school students Adults 1

11 Chinese language learning becoming more popular with adults We estimate the Korean market for Chinese language education at KRW6b this year. Of this, Daekyo should make sales of KRW55.4b for a market share of 9.2%. We estimate sales at two unlisted rivals at less than KRW1b each (though actual figures are unavailable). We forecast that Caihong s market share will hit 12.3% in 217 and 15% in 22, backed by the strong appeal of its one-on-one model among adult learners. Demand for Chinese-language lessons has been on the rise in Korea, and Daekyo s B2B sale have spiked since 214 alongside a rise in Chinese visitor numbers, whose destinations have expanded from just Myeongdong (Seoul) to other places (including Seoul s Gangnam district and Jeju Island). With these trends, more tour guides and shop assistants have felt the need to speak Chinese. Daekyo recently won contracts to offer Chinese language programs to Prada Korea, Swatch Korea, Lotte Hotel, Lotte Duty Free Store, and Credu. We expect the education services provider to add more clients from the duty-free store, clothing, accessories, cosmetics, retail, and beauty stores businesses. Chart 15. Chinese visitors to Korea Chart 16. Foreign visitors to Korean duty-free shops and sales to those visitors (' people) 2,5 (USDb) 6 (Bil people) 18 2, Number of foreign visitors (RHS) 1, , Q13 3Q13 1Q14 3Q14 1Q15 3Q15 Sales to foreign visitors (LHS) Source: KTO, Samsung Securities Source: Korea Duty-Free Association, Samsung Securities 11

12 Furthermore, Chinese language education is in strong demand among jobseekers and those hoping to change jobs or enhance their skills. Multiple surveys reveal that: 1) improving foreign language proficiency and related test scores are seen as prerequisites for finding a job or for self-improvement; and 2) Chinese is seen as the most important language after English. Amid intensifying competition in the job market and backed by the perception that learning a foreign language at a younger age is more efficient, we believe Chinese language demand will grow among everyone from preschoolers and teenagers to adults. Chart 17. Survey: What are the prerequisites for finding a job at a large enterprise? Chart 18. Survey: What are the most important foreign languages for finding a job? Foreign language course or certificate Internship (%) 12 9 Group study for company entrance Private institute for company entrance 6 3 Other (%) English Chinese Japanese Portugese Spanish Russian French Note: 33 jobseekers took the survey in Mar 215; selecting multiple answers was possible Source: Career (job website), Samsung Securities Note: 171 jobseekers took the survey in Oct 214; selecting multiple answers possible Source: Saramin (job website), Samsung Securities Chart 19. Survey: What are the paths to self-enrichment? Chart 2. Survey: What is your preferred foreign language for achieving self-enrichment? Learning foreign languages Getting certificates (%) 4 Work-related study 3 Reading Going to gym 2 Other 1 Studying finance Learning to sing or play Nothing (%) 2 4 English Chinese Japanese French German Spanish Russian Arabic Other Note: 1,741 jobseekers took the survey in Apr 215; selecting multiple answers was possible Source: Gangsa.com (job portal website), Samsung Securities Note: 1,741 jobseekers took the survey in Apr 215; selecting multiple answers was possible Source: Gangsa.com (job portal website), Samsung Securities 12

13 Caihong s customized service appealing to people with busy schedules Caihong s competitiveness lies in its one-on-one tutoring model that has long been used in the firm s Noonnoppi business. Adult learners find Caihong programs convenient and attractive, as: 1) they offers lessons tailored to individuals; and 2) tutors meet learners at their place of choice eg, at the office, at home, in a coffee shop, or elsewhere (including Daekyo s own classrooms branded Caihong Square) as often as the student wants (usually once or twice a week). This is in contrast to traditional language institutes, where learners struggle to catch up if they skip some classes. The oneon-one tutoring model is well suited to busy modern life. Numerous companies, including several financial institutions, are providing Caihong group classes for their employees the Caihong instructors visit conference rooms early in the morning or at lunchtime. Caihong also differs from its rivals in that its textbooks use a storytelling approach. To keep its textbooks entertaining, Daekyo has used that approach for several subjects in its Noonnoppi business and has applied it to Caihong from the beginning. As a result, students of all ages stay interested in the Chinese lessons longer, and adult subscribers take more classes than they would do with rivals textbooks a factor serving to boost ARPU. Chart 21. Caihong Square Chart 22. Page from Caihong textbook for adults Source: Company image Source: Company image 13

14 Chances for administering HSK Hanyu Shuiping Kaoshi (HSK) is China s only standardized test of Chinese language proficiency for non-native speakers. The number of Koreans taking the HSK almost tripled from 65, in 211 to 19, in 214. Daekyo last year obtained a license to administer the HSK, which it should start doing from next year. This should lead to annual sales of KRW2b (based on an average test fee of KRW6,) and operating profit of KRW8m. We estimate that the recognition of HSK sales from 216 would boost Caihong s operating margin from 9.8% to 1.8% next year. Our Caihong sales forecast assumes 32, HSK test takers at Daekyo next year. This assumption is based on two factors. First, out of 41, Caihong subscribers, 4,5 are now enrolled in HSK preparation courses and are likely to take the HSK administered by Daekyo. Second, Daekyo has 28 test centers (currently used for the Youth Chinese Test: YCT). If Daekyo uses all of its test centers for the HSK, Korea s total number of HSK test centers would jump around 36% from the current total of 77 (operated by HSK Korea, a few universities, and Tang Chinese Education Korea). We conservatively estimate that Daekyo will attract 15% (28,) of HSK test-takers who would otherwise have taken the test elsewhere. Chart 23. HSK: Test-takers and growth (' people) 3 (% y-y) 9 Chart 24. Number of test centers: HSK vs HSK + YCT (Number) 12 2 Growth(RHS) Number of test-takers (LHS) HSK HSK+YCT Seoul Other regions Source: Local media, Samsung Securities estimates Source: Local media, Company data, Samsung Securities estimates 14

15 Contents Noonnoppi profitability improving on addition of more learning centers Noonnoppi-profitability improving notably As for Daekyo s flagship home-tutoring service, Noonnoppi, marked improvement in profitability should grab investors attention more than top-line growth does. We project that Noonnoppi sales will inch up.7% y-y to KRW65.8b in 216 after contracting 4.4% in 213,.7% in 214, and an estimated.6% in 215. Such sales, however, should stay similar y-y in 217 on a reduction in the learning center openings. Noonnoppi profits should follow a similar trajectory. Operating profit contracted 24.7% in 213 and 5.5% in 214, but should grow 9% this year and 12.3% in 216. However, excluding the KRW2.3b the firm spent last year on overhauling its company and brand image, operating profit would have contracted 1% in 214, and then likely grown just 4% this year and 1.5% in 216. Operating profit growth should lose some steam in 217, slowing to 8.5% due to a slowdown in top-line growth. Nonetheless, operating margin from the Noonnoppi business should remain on an uptrend, rising from 5.7% in 214 (or 6.1% excluding the image overhaul) to 7.6% in 217. Chart 25. Noonnoppi: Sales and growth Chart 26. Noonnoppi: Operating profit trends 7 Growth (RHS) (% y-y) 3 6 Operating margin(rhs) Growth (RHS) (% y-y) Sales(LHS) (3) 15 Operating profit (LHS) (15) E 216E 217E (6) E 216E 217E (3) 15

16 Learning centers enjoy higher margins than home-tutoring model Daekyo first opened a learning center back in 28. The facility combines the characteristics of a study room and an offline institute (seen image below), where a teacher can tutor several students at the same time eg, six students may visit the learning center in a given hour, allowing the teacher to provide one-on-one help to each student for around ten minutes apiece. Daekyo s number of learning centers rose explosively, almost tripling from 235 in 29 to 74 at end-3q15 because the setting: 1) helps students concentrate better; and 2) facilitates the learning of a greater number of subjects, including online classes (in addition to offline teaching), online English conversion lessons, and customized math programs. On average, learning-center attendees study three subjects (eg, math, English, and Korean) meaning three subscriptions per individual whereas home-tutoring service subscribers average two subscriptions. Learning centers offer a higher operating margin (7% in 214) than the home-tutoring model does (4.4%) because: 1) the average number of subscriptions per teacher is 23, vs 15 for the hometutoring model; and 2) learning center teachers are more time-efficient, as they do not lose time traveling between student locations. We expect Noonnoppi s operating margin to trend up from 5.7% in 214 to 6.3% in 215, 7% in 216, and 7.6% in 217 in tandem with growth in the learning center portion of sales (from 5% currently). As stated above, however, operating margin growth should lose steam in 217 as the addition of new learning centers slows. Given that the learning center model is appropriate for elementary school students but not for preschoolers and toddlers, we forecast the learning center portion of sales will max out at 6% (ie, the elementary school student portion of all Noonnoppi subscribers). Chart 27. Number of learning centers vs net openings Chart 28. Noonnoppi learning center (Number) 9 Net openings(rhs) (Number) Number of learning centers (LHS) E 217E Source: Company image 16

17 Chart 29. Subscriptions per student: Home tutoring vs learning centers Chart 3. Operating margin: Home tutoring vs learning centers (Number) (%) Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15E E Home tutoring Learning centers Home tutoring Learning centers Making inroads into overseas markets for long-term growth momentum Faced with limited growth momentum from the learning-center model, Daekyo has pursued growth by building a presence overseas. Although its overseas operations have yet to contribute to consolidated earnings, the have swiftly narrowed their losses based on robust sales growth. Overseas sales came in at KRW16.4b in 213 and KRW17.9b in 214, and we estimate that they will grow 22.6% to KRW21.9b in 215, 23.5% to KRW27.1b in 216, and 28% to KRW34.6b in 217. Daekyo s number of overseas learning centers should also climb from 519 in 213 to 737 in 217, with annual per-center sales rising from KRW3m to KRW5m over the same period (vs per center sales of KRW4m domestically). Accordingly, operating losses from the overseas business should narrow from KRW5.8b in 214 to KRW3.8b in 215, KRW2.8b in 216 and then KRW6m in 217. Driving growth in franchisees and subscribers is the firm s Thinking Math programs (critical thinking math education) that differentiate Daekyo from Kumon (Japan), which focuses on calculation. Chart 31. Overseas business: Sales vs operating profit Chart 32. Overseas business: Number of learning centers vs per-center sales (Number) Operating profit(rhs) 6 Sales per center (RHS) 4 2 (3) 1 Sales(LHS) E 216E 217E (6) (9) 3 Number of centers (LHS) E 216E 217E 2 17

18 In Korea, Daekyo is ahead of Kumon in terms of market share (18% vs 16%), but the Japanese firm is massively dominant overseas. Kumon currently boasts 4.2m subscriptions in 47 countries (excluding Japan), whereas Daekyo, which first expanded overseas in 23, now has 1.8m subscriptions in seven countries excluding Korea (ie, the US, Hong Kong, China, Malaysia, Indonesia, Singapore, and Vietnam). Both firms use the one-on-one education model only in Korea and apply the franchise model elsewhere. Comparing sales and operating profit of their respective overseas franchise models reveals that Kumon far outperforms Daekyo the former boasts an overseas operating margin of 14%. If Daekyo can leverage the competitiveness of its overseas brand Eye Level to expand its overseas operations, its overseas profitability should gradually improve. The firm plans to reinforce its online marketing to attract franchisees and add more countries to its existing seven markets. The firm established a subsidiary in India in September and plans to set one up in the UK by year-end. Chart 33. Overseas market and subscriptions: Daekyo vs Kumon Chart 34. Global earnings (excluding Korea): Daekyo vs Kumon (Number) (Mil) (USDm) * (5) 3 Daekyo Kumon (1) Daekyo Kumon Countries entered (LHS) Subscriptions (RHS) Sales Operating profit Note: * Does not include countries with Daekyo franchises but no Daekyo subsidiary Source: Company data, Samsung Securities Note: Based on most-recent accounting year Source: Company data, Samsung Securities 18

19 Contents Dividends high, financial structure stable Additional investment points are Daekyo s attractive dividend and stable financial structure. The firm has implemented shareholder-friendly policies and kept its DPS steady for several years. Its dividend payout ratio has stayed above 4% since 27 (on a consolidated basis) and we foresee no changes in this policy any time soon. While the ratio is below its domestic peer average (5%), we see it as appropriate given that Daekyo needs to make further investments in Caihong and its overseas business. Also, the payout ratio is far higher than those of domestic consumer goods firms that are recording earnings growth of more than 2% y-y. Chart 35. Net profit attrib. to controlling interests vs dividend payout ratio on consolidated basis (%) 6 9 Chart 36. DPS vs dividend yield (KRW) (%) Payout ratio(rhs) Net profit attrib. to controlling interests (LHS) E E DPS for common shares (LHS) DPS for preferred shares (LHS) Dividend yield for common shares (RHS) Dividend yield for preferred shares (RHS) While sticking to a no-leverage policy, the firm has maintained a stable financial structure. Its debtto-equity ratio (including only current liabilities) stood at 31.4% in 214 and just 28.4% in 1H15 (vs a sector average of 45%). At end-214, the company had KRW17.4b in cash and cash equivalents, KRW117.3b in short-term financial assets, and KRW167.8b in long-term available-for-sale securities (over 6% of which was shares in Shinhan Financial Group). The combined asset value amounted to KRW392.5b and represented 46.6% of total assets and 57.9% of market cap. Given prospects of limited growth in the domestic education market, Daekyo is likely to use its cash for M&A activity or to start new education-related businesses. We note that the firm used cash holdings to buy back.3% of its common stock and.3% of its preferred stock, which it then distributed among employees as incentive payments. Investors are advised to monitor what new business Daekyo starts and whether it is able to capitalize on its strong brand power in the new market. 19

20 Table 8. Major assets as portions of total assets and market cap E Cash & equivalents (A) Current financial assets (B) Non-current available-for-sale assets* (C) Total (A)+(B)+(C) Total assets As portion of total assets (%) Market cap** As portion of market cap (%) Note: * Shinhan Financial Group shares account for around 6% of non-current available-for-sale assets; ** 215 market cap estimate based on Oct 27 close Chart 37. Total debt vs debt ratio (%) 4 35 Chart 38. Investment in assets Debt ratio (RHS) Total debt (LHS) E E Investment in tangible asset Investment in intangible asset Chart 39. Treasury shares: Number and value Chart 4. Shareholders (common stock) (Mil share) 16 Value of treasury shares (RHS) Number of treasury stock(lhs) Q15 Common stock Preferred stock Daekyo culture foundation: 3% Chairman et al: 5% National Pension Service: 7% Other: 21% Treasury stock: 1% Daekyo Holdings: 54% Source: Company data, Samsung Securities 2

21 Table 41. Daekyo Group structure Yeong-joong Kang 81.99% Daekyo Holdings 54.51% 4.84% 8.27% 9.6% 54.51% 1% 62.21% Daekyo CNS Daekyo D&S Daekyo Daekyo ENC Gangwon Deepseawater Daekyo Educamp Daekyo America Eye Level Hub 99.86% 5.6% 5.6% Daekyo Edupia 98.64% Daekyo Hong Kong 47.89% Daekyo Indonesia 99.83% Daekyo CSA Daekyo Beijing Daekyo Singapore 7.% 1% 1% Daekyo Bookstore Daekyo Shanghai Daekyo Vietnam 97.93% 1% 1% Daekyo Malaysia Daekyo India 1% 1% Source: Company data, Samsung Securities 21

22 Income statement Year-end Dec E 216E 217E Sales Cost of goods sold Gross profit Gross margin (%) SG&A expenses Operating profit Operating margin (%) Non-operating gains (losses) Financial profit Financial costs Equity-method gains (losses) Other Pre-tax profit Taxes Effective tax rate (%) Profit from continuing operations Profit from discontinued operations Net profit Net margin (%) Net profit (controlling interests) Net profit (non-controlling interests) (3) (2) 1 (3) (3) EBITDA EBITDA margin (%) EPS (parent-based) (KRW) EPS (consolidated) (KRW) Adjusted EPS (KRW)* Balance sheet Year-end Dec E 216E 217E Current assets Cash & equivalents Accounts receivable Inventories Other current assets Fixed assets Investment assets Tangible assets Intangible assets Other long-term assets Total assets Current liabilities Accounts payable Short-term debt Other current liabilities Long-term liabilities Bonds & long-term debt Other long-term liabilities Total liabilities Owners of parent equity Capital stock Capital surplus Retained earnings Other 26 (3) (3) (3) (3) Non-controlling interests equity Total equity Net debt (148) (189) (218) (244) (274) Cash flow statement Year-end Dec E 216E 217E Cash flow from operations Net profit Non-cash profit and expenses Depreciation Amortization Other (8) (25) (14) (17) (21) Changes in A/L from operating activities 3 7 (2) 2 Cash flow from investments (29) (12) (53) (69) (79) Change in tangible assets (5) (17) (22) (26) (33) Change in financial assets 46 (16) (1) (13) (16) Other (25) 21 (3) (3) (3) Cash flow from financing (16) (14) (22) (19) (24) Change in debt 4 7 (5) 2 3 Change in equity 1 Dividends (2) (19) (22) (26) (32) Other (1) (3) Change in cash Cash at beginning of year Cash at end of year Gross cash flow Free cash flow Note: * Excluding one off items ** Fully diluted, excluding one-off items *** From companies subject to equity-method valuation Financial ratios Year-end Dec E 216E 217E Growth (%) Sales (3.4) (3.5) Operating profit.2 (3.2) Net profit Adjusted EPS** Per-share data (KRW) EPS (parent-based) EPS (consolidated) Adjusted EPS** BVPS 6,968 6,929 7,92 7,412 7,81 DPS (common) Valuations (x) P/E*** P/B*** EV/EBITDA Ratios (%) ROE ROA ROIC Payout ratio Dividend yield (common) Net debt to equity (22.9) (29.5) (33.) (35.6) (38.) Interest coverage (x)

23 Compliance notice - As of Oct 29, 215, the covering analyst(s) did not own any shares, or debt instruments convertible into shares, of any company covered in this report. - As of Oct 29, 215, Samsung Securities holdings of shares and debt instruments convertible into shares of each company covered in this report would not, if such debt instruments were converted, exceed 1% of each company s outstanding shares. - This report has been prepared without any undue external influence or interference, and accurately reflects the views of the analyst(s) covering the company or companies herein. - All material presented in this report, unless specifically indicated otherwise, is under copyright to Samsung Securities. - Neither the material nor its content (including copies) may be altered in any form, or by any means transmitted, copied, or distributed to another party, without prior express written permission from Samsung Securities. - This memorandum is based upon information available to the public. While we have taken all reasonable care to ensure its reliability, we do not guarantee its accuracy or completeness. This memorandum is not intended to be an offer, or a solicitation of any offer, to buy or sell the securities mentioned herein. Samsung Securities shall not be liable whatsoever for any loss, direct or consequential, arising from the use of this memorandum or its contents. Statements made regarding affiliates of Samsung Securities are also based upon publicly available information and do not necessarily represent the views of management at such affiliates. - This material has not been distributed to institutional investors or other third parties prior to its publication. Target price changes in past two years (KRW) 12, 1, 8, 6, 4, 2, Oct 13 Apr 14 Oct 14 Apr 15 Oct 15 Rating changes in past two years Date 215/1/29 Recommendation BUY Target price (KRW) 13, Samsung Securities uses the following investment ratings. Company BUY Expected to increase in value by 3% or more within 12 months and is highly attractive within sector BUY Expected to increase in value by 1% or more within 12 months HOLD Expected to increase/decrease in value by less than 1% within 12 months SELL Expected to decrease in value by 1% or more within 12 months SELL Expected to decrease in value by 3% or more within 12 months Industry OVERWEIGHT Expected to outperform market by 5% or more within 12 months NEUTRAL Expected to outperform/underperform market by less than 5% within 12 months UNDERWEIGHT Expected to underperform market by 5% or more within 12 months Percentage of ratings in 12 months prior to Sep 3, 215 BUY (71.8%) HOLD (28.2%) SELL (%) 23

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