(7287/BUY ) RESULTS NOTE 3Q numbers down y-y but in line with estimates Target price KRW2, Upside/downside +19.8% Current price KRW166,9 3Q earnings disappoint on weak high school online division performance s sales and operating profit declined 1.7% and 9.3% y-y, respectively in 3Q. Operating margin also slipped 3.3%pts y-y to 38.8%, as: 1) the portion of sales from its profitable high school online division dwindled from 49.1% in 3Q9 to 44.5% in 3Q1, as divisional sales dropped 11% y-y as this year s KSAT will be based on content and lectures provided by government broadcaster EBS; and 2) SG&A costs increased on one-off promotions. Excluding KRW4b in one-off promotion costs, operating margin would have improved 2%pts y-y to 44%, as operating margin at s middle school online and high school offline divisions rose 5.9%pts and 4.6%pts y-y, respectively, to 33.7% and 26.3%, on operating leverage and cost cuts. Analyst Boyoung Kim by113.kim@samsung.com 822 22 7783 Research Associate Jackie Jang jaeyeon.jang@samsung.com 822 22 7811 AT A GLANCE Sector Education Market capitalization KRW1.t/USD912.7m Shares outstanding (float) 6,34,667 (66.3%) 52-week high/low KRW262,5/KRW149, Bloomberg 7287 KS 6-day average volume 12,26 Share ownership J.E.Sohn, et al. (35.2%) Performance 1M 6M 12M Absolute -4% -11% -26% Relative -6% -2% -39% Maintaining BUY from a trading perspective Although the number of the company s high school online subscribers may return rapidly after November s KSAT (as happened in 24, when the government stated it would be sourcing KSAT questions from EBS material), we believe it is too early to reflect such anticipation in our earnings forecast, as: 1) the company s online market penetration has expanded to over 6% of all high school students, implying upside momentum will slow; 2) proposed revisions to the 214 KSAT (eg, a reduction in the number of subjects) may negatively impact the firm from 211; and 3) the number of high school students should start to fall from 212. That said, we maintain our six-month target price of KRW2, (equivalent to a 211 P/E of 16x) applying a premium to the market believing the shares (currently trading at 13x 211 P/E) still offer potential, backed by strong cash-generating capabilities in the firm s online business and earnings stability in its consumer business. We maintain a one-star BUY rating on the stock and advise trading the shares up to the target price. SUMMARY OF 3Q RESULTS VALUATION SUMMARY (KRWb) 3Q1 Chg Diff (%) 29 21E 211E (% y-y) (% q-q) Samsung Consensus Multiples (x) Sales 76.5 (1.7) 39..2 (3.4) P/E 16. 15.9 13.5 Operating profit 29.7 (9.3) 52.8 (3.8) (9.2) P/B 4.5 3.7 3. Pre-tax profit 31.2 (11.7) 48.8 (4.8) (11.2) EV/EBITDA 1.2 9.9 7.5 Net profit 23.4 (12.6) 47.3 (5.6) (1.8) Div yield (%) 1.4 1.3 1.5 Margins (%) EPS growth (%) 3.4.6 18.2 Operating profit 38.8 ROE (%) 32.9 25.4 24.6 Pre-tax profit 4.7 Per share data (KRW) Net profit 3.6 EPS 1,433 1,491 12,43 Source: Company data, Samsung Securities estimates BVPS 37,19 45,335 55,64 DPS 2,3 2,1 2,5 Samsung Securities (Korea) www.samsungfn.com
Business operation by division High school online division: s high school online division posted 3Q sales of KRW33.8b (down 11% y-y), and an operating margin of 47.5% (vs 55.4% in 3Q9) due to increased SG&A and per-unit fixed costs. Considering the company s fall in market share of total time spent online (as tracked by Koreanclick), earnings will likely remain sluggish until the Nov 18 KSAT exam, despite subscriber numbers rebounding in October. That said, a sales decline in 4Q should be limited to 4% y-y an improvement on the decline in 3Q thanks to the base effect of delayed demand from re-takers in 4Q9. Middle school online division: The middle school online division s 3Q sales grew a mere 16% y-y, missing the company guidance of 21% y-y growth, which we attribute partly to September s Chuseok holidays middle school division sales are largely affected by the academic calendar. Considering the falling number of middle school students, the division s top-line growth should be limited to around 15% going forward. As 3Q operating margin came in at 33.7%, further improvements should be limited. High school offline division: s high school offline division s 3Q sales came in at KRW19.3b, up 11% y-y. We forecast that sales will grow 2% y-y in 211, as the company plans to establish a boarding-type academy in Yongin in November. The academy will be capable of accommodating up to 1, students and is expected to bring in sales of KRW15b-2b in 211. Initial costs may weigh on operating margin, but profitability should quickly normalize, as the firm has three to four years experience from operating two boarding-type academies in Namyangju and Kwangju. Also, the company introduced its Pimple scholarship system this year in order to increase its market share. As has already recognized the related budget as provisioning expenses, it should be less of a burden than expected. Subsidiaries China business taking off: Online lectures for high school students, recorded by star teachers from prestigious high schools in China, will be available from Nov 5 in Guangzhou. The firm s Chinese subsidiary, China, should acquire a local online education provider, New Class, to begin operations, first in Shanghai and then in Jiangsu and Wuhan next year. Its China business will likely incur some losses over the next one to two years due to initial investment costs, but we are positive on s move into China, as the country s education services market has huge growth potential. Earnings estimates should be possible for the China business once the services are fully up and running going forward. Mega MD & MegaBooks: Both companies performed as soundly in 3Q as in 2Q. Mega MD recorded accumulated 3Q sales of KRW18b-19b, up 15-17% y-y, with operating margin at 25-27%. MegaBooks, despite the EBS effect, recorded accumulated 3Q sales and operating profit of KRW7b and KRW.7b, respectively both flat y-y. MegaBooks plans to begin offering material for junior high school students, diversifying its business channels and promoting earnings momentum. To add two new subsidiaries: plans to add two subsidiaries this year in preparation for launching into new businesses. First, the company will acquire a smallscale company in 4Q and prepare to enter the college-transfer-prep market. We believe there is room for growth as the main target of the transfer market is students with good scores Mega MD s target market. Second, Mega Food & Service was established this month. As its offline institutes are expanding, intends to internalize its accessorial catering service through the subsidiary, entering the school catering service market to which the government is likely to provide aid, in the long term. 2
Figure 1. Sales breakdown (KRWb) 1Q1 2Q1 3Q1 4Q1E 29 21E 211E Sales Total 63.2 55. 76.5 46.7 238.3 241.4 276.4 Online lectures 38.3 31.6 48. 35.9 154.1 153.8 171.4 25.3 19.6 33.8 22. 19.7 1.8 19.7 Mbest 12.9 12. 14.2 13.9 44.4 53. 61.7 Online material 5.5 3.6 4.4 3. 22.7 16.5 2.8 Offline institutes 17. 16.8 19.3 7.6 56.2 6.7 72.8 Other 2.4 3. 4.8.2 5.4 1.5 11.3 Chg (% y-y) Total 6.9 1. (1.7) (.4) 17.8 1.3 14.5 Online lectures 3.9 (.8) (4.9) 3. 21.3 (.2) 11.5 (4.5) (11.1) (11.4) (4.1) 18.8 (8.2) 8.9 Mbest 25.6 22.2 15.3 16.5 28.2 19.5 16.4 Online material (5.3) (2.2) (47.1) (26.2) 14.4 (27.3) 26.2 Offline institutes 12.1 1.1 1.8 8.3 12.1 8. 2. Other 88.7 11.3 189.6 (76.9) (.4) 95. 8. Portion (%) Total 1. 1. 1. 1. 1. 1. 1. Online lectures 6.6 57.5 62.7 76.9 64.7 63.7 62. 4. 35.6 44.2 47.1 46. 41.8 39.7 Mbest 2.4 21.8 18.6 29.8 18.6 22. 22.3 Online material 8.7 6.5 5.8 6.4 9.5 6.8 7.5 Offline institutes 26.9 3.5 25.2 16.3 23.6 25.1 26.3 Other 3.8 5.5 6.3.4 2.3 4.3 4.1 Source: Company data, Samsung Securities estimates Figure 2. High school online market-share trends Figure 3. Middle school online market-share trends (%) 1 8 Etoos Winnerstudy Vitaedu (%) 1 8 Educlub Soobakc 6. 6 1318 4 4 Mbest 2 EBSi 2 24 25 26 27 28 29 21 Source: Koreanclick, Samsung Securities 26 27 28 29 21 Source: Koreanclick, Samsung Securities 3
Figure 4. P/E band chart (KRW) 45, 4, 35, 3, 25, 2, 15, 35x 3x 25x 2x 15x 1, 5, 25 26 27 28 29 21 Source: Company data, Samsung Securities estimates Figure 5. Consumer sector: P/E vs EPS growth 211 P/E (x) 3 Figure 6. Consumer sector: Market cap vs FCF Market cap (KRWb) 16, 25 LG H&H 2 Amorepacif ic Raffles Credu Shinsegae 15 Benesse Lotte Shopping CJ Conf ectionery CJ O Shopping Stray er 1 5 KT&G Woongjin Thinkbig (4) (3) (2) (1) 1 2 3 21-212 EPS CAGR (%) 14, 12, 1, 8, 6, 4, 2, Lotte Shopping Shinsegae KT&G LG H&H Amorepacific Woongjin Thinkbig CJ Conf ectionery FCF (KRWb) 1 2 3 4 5 6 7 Sources: Bloomberg, Samsung Securities estimates Sources: Bloomberg, Samsung Securities estimates 4
Income statement Year-end Dec 31 (KRWb) 28 29 21E 211E 212E Sales 22.3 238.3 241.4 276.4 34. COGS 75.3 86.9 9.3 14.1 115.1 Gross profit 127. 151.4 151.1 172.2 189. (Margin, %) 62.8 63.5 62.6 62.3 62.2 SG&A 59.4 66.7 68.7 79.2 84.2 Operating profit 67.6 84.7 82.4 93.1 14.8 (Margin, %) 33.4 35.6 34.1 33.7 34.5 Net interest income 2.8 4.4 6.6 8.5 11. Net forex-related gains (.1) (.1)... Net equity-method gains (.7) (1.6).6 4.1 7. Other 1.2 2.7 (1.5) (1.5) (1.5) Pre-tax profit 7.7 9.2 88.1 14.2 121.3 Taxes 19.1 22. 21.6 25.5 29.7 Net profit 51.5 68.3 66.5 78.6 91.6 (Margin, %) 25.5 28.7 27.6 28.5 3.1 Sustainable income* 5.7 66.2 66.5 78.6 91.6 (Margin, %) 25.1 27.8 27.6 28.5 3.1 EBITDA 71.8 89.1 88.6 17.4 118.3 (Margin, %) 35.5 37.4 36.7 38.8 38.9 Reported EPS (KRW) 8,129 1,769 1,491 12,43 14,448 Adjusted EPS (KRW)* 8,3 1,433 1,491 12,43 14,448 DPS (common, KRW) 1, 2,3 2,1 2,5 2,9 Dividend payout ratio (%) 12.5 22. 2. 2.2 2.1 Cash flow Year-end Dec 31 (KRWb) 28 29 21E 211E 212E Cash flow from operations 51.8 82.3 71.8 89.5 95. Net profit 51.5 68.3 66.5 78.6 91.6 Depreciation & amortization 4.9 6. 5.6 1.2 6.5 Net forex translation gains (losses).3.... Net equity-method gains (losses).7 1.6 (.6) (4.1) (7.) Gross cash flow 6.6 75.8 71.8 85. 91.4 (-) Change in working capital 3. 6.9 (.) 4.4 3.5 Other (8.7) (.5).3.4.4 Cash flow from investments (28.2) (52.4) (21.3) (6.6) (7.8) Capex (1.5) (1.7) (17.) (4.) (5.) Equity investment (3.1) (1.8) (3.) (1.2) (1.2) Free cash flow 35.8 67.7 5.5 82.8 87.2 Other (14.5) (39.9) (1.3) (1.4) (1.6) Cash flow from financing (31.4) (6.2) (14.4) (13.3) (15.7) Chg in debt (4.9).... Chg in equity..... Dividends (11.4) (6.2) (14.4) (13.3) (15.7) Other 4.9.... Chg in cash (7.8) 23.6 36.1 69.5 71.4 Cash at beg of year 22.3 14.5 38.1 74.2 143.7 Cash at end of year 14.5 38.1 74.2 143.7 215.2 Note: * Fully diluted, excluding one-off items Source: Company data, Samsung Securities estimates Balance sheet Year-end Dec 31 (KRWb) 28 29 21E 211E 212E Current assets 85.1 165.7 22.1 274. 347.4 Cash & equivalents 14.5 38.1 74.2 143.7 215.2 Accounts receivable 8.3 6.9 7. 8. 8.8 Inventories.2.... Other current assets 62.1 12.7 12.8 122.2 123.4 Fixed assets 126.5 119.3 135.6 136.2 144.5 Investment assets 36.3 35.6 39.2 44.6 52.8 Tangible assets 53.7 49.1 61. 57.7 56.3 Intangible assets 2.9 3.5 4.3 2.8 4.4 Other long-term assets 33.7 31.1 31.1 31.1 31.1 Total assets 211.6 285. 337.6 41.2 491.9 Current liabilities 43.3 47.9 48.1 55. 6.5 Accounts payable 3.8 3.7 3.3 3.8 4.2 Short-term debt..... Other current liabilities 39.5 44.3 44.8 51.2 56.3 Long-term liabilities 1.3 1.7 2. 2.4 2.8 Bonds & long-term debt..... Other long-term liabilities 1.3 1.7 2. 2.4 2.8 Total liabilities 44.6 49.7 5.2 57.4 63.3 Capital stock 3.2 3.2 3.2 3.2 3.2 Capital surplus 28.3 28.3 28.3 28.3 28.3 Retained earnings 161.2 223.2 275.4 34.7 416.6 Other (25.7) (19.4) (19.4) (19.4) (19.4) Total equity 167. 235.3 287.5 352.8 428.7 Net debt (65.6) (148.6) (184.7) (254.2) (325.7) Book value per share (KRW) 26,331 37,19 45,335 55,64 67,67 Financial ratios Year-end Dec 31 28 29 21E 211E 212E Growth (%) Sales 23.8 17.8 1.3 14.5 1. Operating profit 15.7 25.4 (2.7) 12.9 12.6 Net profit 11.5 32.5 (2.6) 18.2 16.5 Sustainable income 17.3 3.4.6 18.2 16.5 EBITDA 17.9 24.1 (.6) 21.2 1.1 Adjusted EPS (KRW)* 17.3 3.4.6 18.2 16.5 Ratios ROE (%) 31. 32.9 25.4 24.6 23.4 ROA (%) 24. 23.2 19.7 19.2 18.6 ROIC (%) 75.2 12. 95.7 126.3 152.5 Net debt to equity (%) nc nc nc nc nc Interest coverage (x) nm nm nm nm nm Receivables turnover days 15 11 11 11 11 Payables turnover days 7 6 5 5 5 Inventory turnover days 1 Valuations (x) P/E 2.9 16. 15.9 13.5 11.6 P/B 6.3 4.5 3.7 3. 2.5 EV/EBITDA 13.8 1.2 9.9 7.5 6.2 EV/EBIT 14.7 1.7 1.6 8.6 7. Dividend yield (common, %).6 1.4 1.3 1.5 1.7 5
Compliance Notice - During the three months prior to Oct 2, 21, Samsung Securities had not participated in any securities issuance (including DRs, CBs, and IPOs) by companies covered in this report. - As of Oct 2, 21, 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. - As of Oct 2, 21, the covering analyst(s) did not own any shares, or debt instruments convertible into shares, of any company covered in this report. - 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. Target price changes in past two years (KRW) 35, 3, 25, 2, 15, 1, 5, Oct 8 Apr 9 Oct 9 Apr 1 Oct 1 Rating changes in past two years Date 28/1/27 29/1/3 6/15 21/1/14 3/1 3/11 9/26 Recommendation BUY(M) BUY(M) BUY(M) BUY BUY BUY BUY Target price (KRW) 22, 21, 26, 26, 26, 22, 2, Samsung Securities uses the following investment ratings: Company BUY Expected to return 3% or more over next 6 months and/or relatively high level of attractiveness within sector BUY Expected to return 2-3% over next 6 months and/or average level of attractiveness within sector BUY Expected to return 1-2% over next 6 months and/or relatively low level of attractiveness within sector HOLD Expected to return between -1% and +1% over next 6 months SELL Expected to lose more than 1% over next 6 months On Mar 11, 21, Samsung Securities changed to a five-level rating system (BUY, BUY, BUY, HOLD, and SELL) from a BUY, HOLD, SELL system. Industry OVERWEIGHT Expected to outperform market by more than 5% over next 6 months NEUTRAL Expected to outperform/underperform market by less than 5% over next 6 months UNDERWEIGHT Expected to underperform market by more than 5% over next 6 months 6
Global Disclosures & Disclaimers General This research report is for information purposes only. It is not and should not be construed as an offer or solicitation of an offer to purchase or sell any securities or other financial instruments or to participate in any trading strategy. This report does not provide individually tailored investment advice. This report does not take into account individual client circumstances, objectives, or needs and is not intended as recommendations of particular securities, financial instruments or strategies to any particular client. The securities and other financial instruments discussed in this report may not be suitable for all investors. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein and investors should seek the advice of a financial adviser. This report may not be altered, reproduced, distributed, transmitted or published in whole or in part for any purpose. References to "Samsung Securities" are references to any company in the Samsung Securities, Co., Ltd. group of companies. Samsung Securities and/or other affiliated companies, its and their directors, officers, representatives, or employees may have long or short positions in any of the securities or other financial instruments mentioned in this report or of issuers described herein and may purchase and/or sell, or offer to purchase and/or sell, at any time, such securities or other financial instruments in the open market or otherwise, as either a principal or agent. Any pricing of securities or other financial instrument contained herein is as of the close of market for such day, unless otherwise stated. Opinions and estimates contained herein constitute our judgment as of the date of this report and are subject to change without notice. The information provided in this report is provided "AS IS". Although the information contained herein has been obtained from sources believed to be reliable, no representation or warranty, either expressed or implied, is provided by Samsung Securities in relation to the accuracy, completeness or reliability of such information or that such information was provided for any particular purpose and Samsung Securities expressly disclaims any warranties of merchantability or fitness for a particular purpose. Furthermore, this report is not intended to be a complete statement or summary of the securities, markets or developments referred to herein. Samsung Securities does not undertake that investors will obtain any profits, nor will it share with investors any investment profits. Samsung Securities, its affiliates, or any of its and their affiliates, directors, officers, employees or agents disclaim any and all responsibility or liability whatsoever for any loss (direct or consequential) or damage arising out of the use of all or any part of this report or its contents or otherwise arising in connection therewith. Information and opinions contained herein are subject to change without notice. Past performance is not indicative of future results. Foreign currency rates of exchange may adversely affect the value, price or income of any security or financial instrument mentioned in this report. For investment advice, trade execution or other enquiries, clients should contact their local sales representative. Any opinions expressed in this report are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or groups of Samsung Securities. Any analysis contained herein is based on numerous assumptions. Different assumptions may result in materially different results. Samsung Securities is under no obligation to update or keep current the information contained herein. Samsung Securities relies on information barriers to control the flow of information contained in one or more areas or groups within Samsung Securities into other areas or groups of Samsung Securities. Any prices stated in this report are for information purposes only and do not represent valuations for individual securities or other financial instruments. Samsung Securities makes no representation that any transaction can or could have been effected at those prices and any prices contained herein may not reflect Samsung Securities' internal books and records or theoretical model-based valuations and may be based on certain assumptions. Different assumptions by Samsung Securities or any other source may yield substantially different results. Additional information is available upon request. For reports to be distributed to US: Securities research is prepared, issued and exclusively distributed by Samsung Securities Co., Ltd., an organization licensed with the Financial Supervisory Service of South Korea. This research may be distributed in the United States only to major institutional investors as defined in Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended, and may not be circulated to any other person otherwise. All transactions by U.S. investors involving securities discussed in this report must be effected through Samsung Securities (America) Inc., a broker-dealer registered with the U.S. Securities & Exchange Commission and a member of the Financial Industry Regulatory Authority/SIPC, and not through any non-u.s. affiliate thereof. The analysts listed [on the front of this report] are employees of Samsung Securities Co., Ltd., or a non-u.s. affiliate thereof, and are not registered/qualified as research analysts under applicable U.S. rules and regulations and may not be subject to U.S. restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account. For reports to be distributed to UK: This report is not an invitation nor is it intended to be an inducement to engage in investment activity for the purpose of section 21 of the Financial Services and Markets Act 2 of the United Kingdom ("FSMA"). To the extent that this report does constitute such an invitation or inducement, it is directed only at (i) persons who are investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2 (Financial Promotion) Order 21 (as amended) of the United Kingdom (the "Financial Promotion Order"); (ii) persons who fall within Articles 49(2)(a) to (d) ("high net worth companies, unincorporated associations etc.") of the Financial Promotion Order; and (iii) any other persons to whom this report can, for the purposes of section 21 of FSMA, otherwise lawfully be made (all such persons together being referred to as "relevant persons"). Any investment or investment activity to which this report relates is available only to relevant persons and will be engaged in only with relevant persons. Persons who are not relevant persons must not act or rely on this report. For reports to be distributed to Korea: This report is for private circulation only, not for sale, and is issued and distributed only to persons who are regarded as "professional investors" as defined under the Financial Investment Services and Capital Markets Act of Korea. For reports to be distributed to Singapore: This report is provided pursuant to the financial advisory licensing exemption under Regulation 27(1)(e) of the Financial Advisers Regulation of Singapore and accordingly may only be provided to persons in Singapore who are "institutional investors" as defined in Section 4A of the Securities and Futures Act, Chapter 289 of Singapore. This report is intended only for the person to whom Samsung Securities has provided this report and such person may not send, forward or transmit in any way this report or any copy of this report to any other person. Analyst Certification The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of such analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research report. The analyst(s) principally responsible for the preparation of this research report receives compensation based on determination by research management and senior management (not including investment banking), based on the overall revenues, including investment banking revenues of Samsung Securities Co., Ltd. and its related entities and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. Copyright 21 Samsung Securities Co., Ltd.. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the prior written consent of Samsung Securities America Inc. 7