Company Report (041510 KQ) Entertainment Rosy earnings outlook for 2Q and beyond Trim TP to W57,400 to reflect EPS dilution; Maintain Buy call We maintain our Buy call on. Although we trim our target price to W57,400 from W70,000 (presented in our January 4th report), this adjustment is only the result of the EPS dilution (18.2%) caused by the companyês rights offering and bonus issue. Since KDB Daewoo Securities was the lead manager for SMÊs rights offering and bonus issue, we were restricted from publishing research papers on the company until May 8th. We only present yearly earnings forecasts for SM, as: 1) entertainment companiesê quarterly revenues tend to fluctuate significantly, and 2) the timing of overseas royalty income recognition varies depending on local business conditions. Although we maintain our 2012 operating profit estimate of W70.3bn, we could raise our forecast sometime soon. Our current estimate was based on our 2012 assumption for the companyês Japanese concert ticket sales (1.2mn). Given the companyês confirmed concert schedule, SM is likely to attract 1.03mn fans to shows in Japan between January~August of this year (based on the maximum capacities of venues). In 2011, the company sold 230,000 high-margin dome concert tickets in Japan (out of a total of 580,000). In 2012, the number has already reached 580,000 based on the confirmed concert schedule. 1Q Review: Revenues up 98.8% YoY; OP up 378.4% YoY In 1Q, SM saw its revenues and operating profit soar by 98.8% YoY and 378.4% YoY, respectively. These strong results were driven by overseas sales (up 402.4% YoY), including the recognition of income related to 2Q~3Q11 albums and concerts in Japan (e.g., GirlsÊ GenerationÊs full Japanese album (released in June), TVXQÊs full album (released in August), merchandise sales at SM TownÊs September Tokyo Dome concert). SMÊs 1Q parent-based operating profit came in at W11.7bn, in line with our expectations (W10~12bn). The companyês consolidated operating profit came in at W16bn (including earnings at SM Japan). Daewoo Securities Co., Ltd. Chang-kwean Kim +822-768-4321 changkwean.kim@dwsec.com Buy (Maintain) Target Price (12M, W) 57,400 Share Price (05/15/12, W) 45,350 Expected Return (%) 26.6 EPS Growth (12F, %) 239.0 Market EPS Growth (12F, %) 19.8 P/E (12F, x) 15.0 Market P/E (12F, x) 9.4 KOSDAQ 480.50 Market Cap (Wbn) 926 Shares Outstanding (mn) 20 Avg Trading Volume (60D, '000) 243 Avg Trading Value (60D, Wbn) 11 Dividend Yield (12F, %) 0.0 Free Float (%) 78.5 52-Week Low (W) 16,600 52-Week High (W) 62,000 Beta (12M, Daily Rate of Return) 0.7 Price Return Volatility (12M Daily, %, SD) 4.0 Foreign Ownership (%) 17.2 Major Shareholder(s) Lee, Soo-man et al. (21.5%) NPS (7.63%) Partners Venture Capital et al. (6.61%) Price Performance (%) 1M 6M 12M Absolute 5.1-6.3 148.3 Relative 10.6-6.9 158.8 Key Business An entertainment company that produces and sells music albums. Earnings & Valuation Metrics FY Revenues OP OP Margin NP EPS EBITDA FCF ROE P/E P/B EV/EBITDA (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (x) (x) (x) 12/10 86 26 29.5 22 1,200 28 26 29.1 12.6 3.3 8.1 12/11 110 21 18.9 17 894 26 17 16.9 45.5 7.3 27.8 12/12F 167 70 42.1 61 3,032 76 44 36.0 15.0 4.1 10.9 12/13F 186 83 44.8 75 3,721 88 66 28.0 12.2 3.1 8.9 12/14F 207 102 49.4 91 4,553 107 81 26.1 10.0 2.4 6.8 Note: All figures are based on non- consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, estimates Share price 340 KOSDAQ 290 240 190 140 90 40 5/11 9/11 1/12 5/12 Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S.
Quarterly OP to stay on the upswing this year SMÊs Japanese album-related royalty income is recognized six months after an albumês release, while concert-related royalty income is recognized four to five months following a concert. As such, SMÊs 2Q earnings should reflect 230,000 ticket sales for concerts (including 80,000 tickets for big arena concerts) held in December 2011 and January~Febuary of 2012. And 3Q earnings are likely to reflect 660,000 ticket sales for concerts held in March~May (including 480,000 tickets for big arena concerts). We forecast the companyês quarterly operating profit to grow through 2H (from W15bn in 2Q, to W18bn in 3Q, and to W25bn in 4Q). The company expects to sell 4mn CDs and attract 2mn fans to concerts in Japan this year. Table 1. Annual earnings trends and forecasts (Wbn, %) 2005 2006 2007 2008 2009 2010 2011 2012F 2013F Revenues 207 293 313 401 618 864 1,049 1,669 1,856 Album 75 88 89 108 146 149 192 202 210 Digital 19 40 44 48 95 85 62 103 131 Overseas 60 48 56 86 158 368 476 998 1150 Album exports 1 3 7 8 7 12 20 27 28 Overseas royalties 58 45 50 78 150 356 457 971 1123 Management 54 117 124 160 219 262 320 365 365 Revenue breakdown Album 36.2 29.9 28.4 26.9 23.7 17.3 18.3 12.1 11.3 Digital 9.0 13.7 14.0 11.9 15.3 9.8 5.9 6.2 7.0 Overseas 28.8 16.5 18.0 21.4 25.5 42.6 45.4 59.8 62.0 Management 26.0 39.9 39.6 39.8 35.5 30.3 30.5 21.9 19.7 Total album sales volume (Â000) 1011 1181 1201 1283 1741 1777 2281 2400 2500 ASP(W) 7400 7400 7400 8400 8400 8400 8400 8400 8400 Digital/Album (%) 24.9 45.7 49.4 44.3 64.8 57.0 32.2 51.3 62.2 Management/Albu m (%) 72 133 140 148 150 175 167 181 174 Cost 156 254 291 358 418 487 731 717 757 Gross profit 65 45 42 76 200 377 369 826 916 Gross margin 29.4 15.1 12.5 17.5 32.3 43.6 33.5 53.5 54.8 Operating profit 12-23 -37-17 93 255 205 703 700 OP margin 5.6-7.7-21.4 10.4 9.9 26.2 18.7 41.0 44.3 Pretax profit 11-29 -71 45 61 226 206 633 742 Pretax margin 5.2-9.6-21.4 10.4 9.9 26.2 18.7 41.0 44.3 Net profit 12-40 -76 43 45 218 165 506 593 NP margin 5.4-13.5-23.0 9.8 7.2 25.2 15.0 32.8 35.5 YoY growth Revenues 41.6 7.1 27.9 54.1 39.9 21.4 59.0 11.2 Album 17.0 1.6 21.3 35.7 2.1 28.3 5.2 4.2 Digital 115.1 9.7 8.9 98.1-10.2-27.4 67.6 26.3 Overseas -19.0 17.0 52.0 84.1 133.1 29.5 109.7 15.2 Management 117.5 6.3 28.4 37.3 19.6 22.1 14.2 0.1 Operating profit TTR RR RR TTB 174.9-19.5 198.0 14.6 Net profit TTR RR TTB 4.5 387.7-24.4 207.2 17.1 Note: All figures are based on non-consolidated K-IFRS Source: Company data, 2
Table 1. 2011~12 Quarterly earnings (Wbn, %) 1Q11 2Q11 3Q11 4Q11 1Q12P Revenues 17 21 30 39 38 Operating profit 2 2 7 10 12 OP margin 12.3 9.5 21.9 24.2 30.6 Net profit 1 3 5 7 9 NP margin 5.5 13.5 17.7 18.5 24.4 QoQ growth Revenues 9.8 41.2 31.3-2.2 Operating profit -14.8 223.4 45.5 23.5 Net profit -22.4 129.1 10.9 26.3 Note: All figures are based on non-consolidated K-IFRS Source: Company data, 3
(041510 KQ/Buy/TP: W57,400) Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F (Wbn) 12/11 12/12F 12/13F 12/14F Revenues 110 167 186 207 Current Assets 83 150 199 266 Cost of Sales 73 77 81 81 Cash and Cash Equivalents 13 62 106 167 Gross Profit 37 90 104 125 AR & Other Receivables 16 24 26 29 SG&A Expenses 16 20 21 23 Inventories 2 2 3 3 Operating Profit (Adj) 21 70 83 102 Other Current Assets 16 24 27 30 Operating Profit 21 70 83 102 Non-Current Assets 71 149 181 213 Non-Operating Profit 0 6 9 10 Investments in Associates 3 3 3 3 Net Financial Income -2-2 -4-5 Property, Plant and Equipment 4 4 3 3 Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 6 5 4 4 Pretax Profit 21 76 92 112 Total Assets 154 299 380 479 Income Tax 4 15 17 21 Current Liabilities 44 65 72 80 Profit from Continuing Operations 17 61 75 91 AP & Other Payables 28 43 48 53 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 3 3 3 3 Net Profit 17 61 75 91 Other Current Liabilities 13 19 22 24 Controlling Interests 17 61 75 91 Non-Current Liabilities 2 4 5 5 Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 0 0 0 0 Total Comprehensive Profit 16 60 74 91 Other Non-Current Liabilities 2 4 4 5 Controlling Interests 16 60 74 91 Total Liabilities 46 69 77 85 Non-Controlling Interests 0 0 0 0 Controlling Interests 108 229 303 394 EBITDA 26 76 88 107 Capital Stock 8 10 10 10 FCF (Free Cash Flow) 17 44 66 81 Capital Surplus 55 114 114 114 EBITDA Margin (%) 23.2 45.7 47.5 51.7 Retained Earnings 45 105 180 271 Operating Profit Margin (%) 18.9 42.1 44.8 49.4 Non-Controlling Interests 0 0 0 0 Net Profit Margin (%) 15.0 36.4 40.1 44.1 Stockholders' Equity 108 229 303 394 Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F 12/11 12/12F 12/13F 12/14F Cash Flows from Op Activities 21 47 68 83 P/E (x) 45.5 15.0 12.2 10.0 Net Profit 17 61 75 91 P/CF (x) 35.0 13.6 11.4 9.5 Non-Cash Income and Expense 9 16 14 16 P/B (x) 7.3 4.1 3.1 2.4 Depreciation 1 1 1 0 EV/EBITDA (x) 27.8 10.9 8.9 6.8 Amortization 4 5 5 4 EPS (W) 894 3,032 3,721 4,553 Others -1 4 5 5 CFPS (W) 1,303 3,334 3,978 4,793 Chg in Working Capital 1-14 -2-3 BPS (W) 5,563 11,005 14,646 19,091 Chg in AR & Other Receivables -9-8 -3-3 DPS (W) 0 0 0 0 Chg in Inventories 1-1 0 0 Payout ratio (%) 0.0 0.0 0.0 0.0 Chg in AP & Other Payables 12 15 5 5 Dividend Yield (%) 0.0 0.0 0.0 0.0 Income Tax Paid -6-15 -17-21 Revenue Growth (%) 27.2 51.8 11.2 11.2 Cash Flows from Inv Activities -19-58 -24-23 EBITDA Growth (%) -9.0 199.1 15.7 21.0 Chg in PP&E -1 0 0 0 Operating Profit Growth (%) -18.4 237.9 18.3 22.7 Chg in Intangible Assets -4-4 -4-4 EPS Growth (%) -25.5 239.0 22.8 22.3 Chg in Financial Assets 0-32 0 0 Accounts Receivable Turnover (x) 11.0 9.2 8.1 8.1 Others -13-22 -20-18 Inventory Turnover (x) 59.7 86.1 75.3 75.3 Cash Flows from Fin Activities 1 60 0 0 Accounts Payable Turnover (x) 6.6 6.5 5.7 5.7 Chg in Financial Liabilities 0 0 0 0 ROA (%) 12.3 26.8 22.0 21.2 Chg in Equity 1 60 0 0 ROE (%) 16.9 36.0 28.0 26.1 Dividends Paid 0 0 0 0 ROIC (%) 99.2 240.2 218.8 252.7 Others 0 0 0 0 Liability to Equity Ratio (%) 42.4 30.3 25.4 21.6 Increase (Decrease) in Cash 3 49 44 60 Current Ratio (%) 189.9 229.3 276.0 332.0 Beginning Balance 10 13 62 106 Net Debt to Equity Ratio (%) -44.2-42.4-46.7-51.2 Ending Balance 13 62 106 167 Interest Coverage Ratio (x) 647.7 2,188.6 2,589.3 3,177.4 Source: Company data, estimates 4
Important Disclosures & Disclaimers Disclosures As of the publication date, Daewoo Securities Co., Ltd and/or its affiliates do not have any special interest with the subject company and do not own 1% or more of the subject company's shares outstanding. Stock Ratings Industry Ratings Buy Relative performance of 20% or greater Trading Buy Relative performance of 10% or greater, but with volatility Hold Relative performance of -10% and 10% Sell Relative performance of -10% Overweight Fundamentals are favorable or improving Neutral Fundamentals are steady without any material changes Underweight Fundamentals are unfavorable or worsening (W) 80,000 60,000 40,000 20,000 0 5/10 11/10 5/11 11/11 5/12 * Ratings and Target Price History (Share price (----), Target price (----), Not covered ( ), Buy ( ), Trading Buy ( ), Hold ( ), Sell ( )) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Daewoo Securities, we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analystês estimate of future earnings. The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions. Analyst Certification The research analysts who prepared this report (the Analysts ) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. Daewoo Securities Co., Ltd. policy prohibits its Analysts and members of their households from owning securities of any company in the AnalystÊs area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of Daewoo Securities, the Analysts receive compensation that is impacted by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Daewoo Securities Co., Ltd. except as otherwise stated herein. Disclaimers This report is published by Daewoo Securities Co., Ltd. ( Daewoo ), a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith, but such information has not been independently verified and Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Korean language. If this report is an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. This report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws and regulations or subject Daewoo and its affiliates to registration or licensing requirements in any jurisdiction should receive or make any use hereof. Information and opinions contained herein are subject to change without notice and no part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Daewoo. Daewoo, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making or other financial services as are permitted under applicable laws and regulations. The price and value of the investments referred to in this report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. 5
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