(041510 KQ) SMTown Coex Artium on track to become a major tourist attraction Entertainment Company Update January 16, 2015 (Maintain) Buy Target Price (12M, W) 50,000 Share Price (1/15/15, W) 39,200 Expected Return 28% OP (14F, Wbn) 36 Consensus OP (14F, Wbn) 40 EPS Growth (14F, %) -18.8 Market EPS Growth (14F, %) -1.0 P/E (14F, x) 45.9 Market P/E (14F, x) 13.1 KOSDAQ 581.39 Market Cap (Wbn) 809 Shares Outstanding (mn) 21 Free Float (%) 78.2 Foreign Ownership (%) 13.6 Beta (12M) 2.00 52-Week Low 24,450 52-Week High 53,200 (%) 1M 6M 12M Absolute 19.1 5.5-11.6 Relative 10.3 1.5-21.6 150 KOSDAQ 130 110 90 70 50 1.14 5.14 9.14 1.15 TVXQ s Japan concert royalties (650,000 attendees) to be booked in 4Q14 Despite some worries, artists have made solid advances in Japan, attracting 1.85mn concertgoers in 2014, up from 1.56mn in 2013 and 900,000 in 2012. For 4Q14, we project to post consolidated revenue of W73.6bn and operating profit of W11.9bn. We expect another solid quarter in 1Q15. Royalties from overseas concerts (which yield high margins) are typically recognized in the subsequent quarter. In 4Q14, we estimate attracted 794,000 concertgoers in Japan (vs. 51,000 in 1Q14, 934,000 in 2Q14, and 72,000 in 3Q14). Reflecting SMTown Coex Artium in our 2015 earnings estimates We recently took a tour of SMTown Coex Artium, s new multipurpose cultural space, which had its grand opening on January 14 th. We were impressed by the quality of the holographic projections of concert/musical performances, which should attract fans looking for a more in-depth experience as well as foreign tourists visiting Seoul. We believe SMTown Coex Artium has the potential to become a new landmark symbolizing the Korean Wave, similar to Hong Kong s Avenue of Stars. The primary revenue sources of the complex are 1) the hologram theaters and 2) the celebrity merchandise shop SUM on the second floor. The complex s fixed costs include 1) W20bn in facility investments (assuming five-year depreciation), 2) W5bn in hologram production costs (three-year depreciation), 3) rent, and 4) operating expenses (such as labor). We estimate the hologram theaters will need to fill 40% of seats to break even. Under a 100% occupancy scenario, we estimate annual revenue and gross profit would be W26bn and W15.8bn, respectively. In our 2015 earnings estimates, we reflected revenue of W13bn and gross profit of W2.9bn, assuming a conservative occupancy ratio of 50%. Retain Buy and Raise TP to W50,000 We have raised our 2015 operating profit and net profit estimates by 6.3% and 7.6%, respectively, reflecting earnings from SMTown Coex Artium. We accordingly lift our target price on the stock to W50,000 (from W46,000). We could see several positive catalysts ahead in 2015, including 1) a potential strategic partnership that could take SM s global business to the next level (similar to YG Entertainment s alliance with LVMH); 2) meaningful momentum in China (drama coproduction scheduled in early 2015; more detailed schedules for artist ventures); and 3) surprisingly strong performances by new business initiatives (mobile games and SMTown Coex Artium). Daewoo Securities Co., Ltd. [Internet/Game/Entertainment] Chang-kwean Kim +822-768-4321 changkwean.kim@dwsec.com Jeong-yeob Park +822-768-4124 jay.park@dwsec.com FY (Dec.) 12/11 12/12 12/13 12/14F 12/15F 12/16F Revenue (Wbn) 143 241 269 281 322 352 OP (Wbn) 26 61 41 36 50 56 OP margin (%) 18.2 25.3 15.2 12.8 15.5 15.9 NP (Wbn) 23 40 19 15 45 49 EPS (W) 1,228 1,994 913 741 2,199 2,379 ROE (%) 20.6 24.7 8.5 6.4 16.9 15.6 P/E (x) 33.2 22.8 48.4 45.9 17.8 16.5 P/B (x) 6.9 4.4 3.9 2.8 2.7 2.3 Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the t U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.
Earnings forecasts Table 1.. Annual earnings and forecasts (Wbn, %) 2008 2009 2010 2011 2012 2013 2014F Revenue 40.1 61.8 86.4 143.0 241.3 269.2 280.9 321.6 CD 10.8 14.6 14.9 19.7 22.3 30.0 27.7 29.4 Digital 4.8 9.5 8.5 6.3 6.4 12.6 11.6 12.3 Overseas 8.6 15.8 36.8 81.1 128.7 127.5 106.5 112.8 Management 16.0 21.9 26.2 35.9 36.3 44.5 40.8 41.1 Other subsidiaries 47.7 54.7 94.3 126.0 Revenue breakdown CD 26.9 23.7 17.3 13.8 9.3 11.1 9.9 9.1 Digital 11.9 15.3 9.8 4.4 2.6 4.7 4.1 3.8 Overseas 21.4 25.5 42.6 56.7 53.3 47.3 37.9 35.1 Management 39.8 35.5 30.3 25.1 15.0 16.5 14.5 12.8 Other subsidiaries 0.0 0.0 0.0 0.0 19.8 20.3 33.6 39.2 Operating profit -1.9 9.3 20.2 25.6 60.5 40.5 36.3 50.0 OP margin -4.7 15.1 23.4 17.9 25.1 15.1 12.9 15.5 Net profit 4.3 4.5 15.9 21.8 37.3 18.0 14.6 45.0 Net margin 10.7 7.3 18.4 15.2 15.5 6.7 5.2 14.0 YoY growth Revenue 27.9 54.1 39.9 65.6 68.7 11.6 4.4 19.5 CD 21.3 35.7 2.1 32.0 13.3 34.3-7.6-2.0 Digital 8.9 98.1-10.2-26.2 1.2 97.6-7.6-2.0 Overseas 52.0 84.1 133.1 120.6 58.6-0.9-16.4-11.5 Management 28.4 37.3 19.6 37.2 0.9 22.7-8.2-7.6 Other subsidiaries 14.7 72.3 130.4 Operating profit RR TTB 117.2 26.7 136.5-33.0-10.4 23.3 Net profit TTB 4.7 253.3 37.1 71.1-51.8-18.8 150.2 Notes: Figures are based on K-GAAP through 2011,and consolidated K-IFRS from 2012; other subsidiaries include DreamMaker and SM C&C 2015F Table 2. Quarterly parent and subsidiary earnings (Wbn) 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 2013 1Q-3Q14 Revenue (consolidated) 50.0 56.9 82.1 80.2 66.9 62.2 78.6 269.2 207.7 33.2 33.4 46.3 51.3 37.9 36.2 47.6 164.3 121.7 SM Japan 10.9 16.3 27.6 29.7 13.6 14.4 13.1 84.5 41.1 DreamMaker 5.0 6.7 8.3 11.5 3.4 8.6 15.9 31.5 27.9 SM C&C 8.9 11.8 13.1 20.8 23.3 12.5 13.2 54.7 49 OP (consolidated) 5.1 3.7 15.0 16.8 4.7 5.4 14.3 40.5 24.4 7.7 2.2 11.9 12.8 4.8 3.1 8.9 34.6 16.8 SM Japan -1.9 2.0 2.1 3.0 1.5 1.6 3.8 5.2 6.9 DreamMaker 0.2 1.1 3.0-0.5-1.0 1.4 3.4 3.8 3.8 SM C&C -0.3 1.2-0.3 1.3 0.5-1.2-1.4 1.9-2.1 2
Table 3. SMTown Coex Artium show details Ticket price (W) Seating capacity (persons persons) Musical 77,000 387 Concert A 44,000 167 Concert B 44,000 167 Table 4. Earnings estimates for SMTown Coex Artium and SUM (gift shop) (Wmn) Occupancy rate 100% 70% 50% 30% Daily avg. audience (persons) 1,082 757 541 324 Performance 721 505 361 216 Musical 387 271 194 116 Concert A 167 117 84 50 Concert B 167 117 84 50 Other 361 252 180 108 Daily revenue 72.5 50.7 36.2 21.7 Performance 40.0 28.0 20.0 12.0 Musical 26.8 18.8 13.4 8.0 Concert A 6.6 4.6 3.3 2.0 Concert B 6.6 4.6 3.3 2.0 Merchandise 32.4 22.7 16.2 9.7 Monthly revenue 2,174.7 1,522.3 1,087.4 652.4 Performance 1,201.4 841.0 600.7 360.4 Merchandise 973.4 681.3 486.7 292.0 Monthly expenses 851.9 848.0 845.4 842.8 Fixed costs 838.9 Depreciation from content development 138.9 Depreciation from facility investment 333.3 Rent 166.7 Operating expenses 200 Variable costs 13.0 9.1 6.5 3.9 COGS 13.0 9.1 6.5 3.9 Monthly gross profit 1,322.8 670.4 235.5-199.5 Annual revenue 26,096.6 18,267.6 13,048.3 7,829.0 Performance 14,416.4 10,091.5 7,208.2 4,324.9 Merchandise 11,680.2 8,176.1 5,840.1 3,504.1 Annual expenses 10,222.4 10,175.7 10,144.5 10,113.4 Annual gross profit 15,874.2 8,091.9 2,903.8-2,284.4 Notes: Seating capacity is based on reservations website data on Jan. 15 th ; assumed W20bn in facility investment (five-year depreciation), W5bn in content production investment (three-year depreciation), W2bn in annual rent, and W2bn in monthly operating costs; based on a COGS ratio of 40% Source: 3
(041510 KQ/Buy/TP: W50,000) Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/13 12/14F 12/15F 12/16F (Wbn) 12/13 12/14F 12/15F 12/16F Revenue 269 281 322 352 Current Assets 245 270 332 394 Cost of Sales 170 183 205 222 Cash and Cash Equivalents 106 125 166 211 Gross Profit 99 98 117 130 AR & Other Receivables 47 49 56 61 SG&A Expenses 58 61 67 74 Inventories 7 8 9 10 Operating Profit (Adj) 41 36 50 56 Other Current Assets 85 88 101 112 Operating Profit 41 36 50 56 Non-Current Assets 148 141 140 138 Non-Operating Profit 1-4 5 5 Investments in Associates 2 2 2 2 Net Financial Income 2 2 3 4 Property, Plant and Equipment 54 51 49 47 Net Gain from Inv in Associates -1 0 0 0 Intangible Assets 50 44 40 36 Pretax Profit 42 32 55 61 Total Assets 392 412 472 532 Income Tax 24 17 12 14 Current Liabilities 113 117 134 147 Profit from Continuing Operations 18 15 43 47 AP & Other Payables 71 74 85 93 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 3 2 2 2 Net Profit 18 15 43 47 Other Current Liabilities 39 41 47 52 Controlling Interests 19 15 45 49 Non-Current Liabilities 13 13 14 14 Non-Controlling Interests -1-1 -2-2 Long-Term Financial Liabilities 11 11 11 11 Total Comprehensive Profit 14 15 43 47 Other Non-Current Liabilities 2 2 3 3 Controlling Interests 15 16 46 50 Total Liabilities 126 131 148 160 Non-Controlling Interests -1-1 -3-3 Controlling Interests 230 245 290 339 EBITDA 50 44 56 62 Capital Stock 10 10 10 10 FCF (Free Cash Flow) 11 24 52 54 Capital Surplus 121 121 121 121 EBITDA Margin (%) 18.6 15.7 17.4 17.6 Retained Earnings 102 118 163 212 Operating Profit Margin (%) 15.2 12.8 15.5 15.9 Non-Controlling Interests 36 36 34 32 Net Profit Margin (%) 7.1 5.3 14.0 13.9 Stockholders' Equity 266 281 324 371 Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/13 12/14F 12/15F 12/16F 12/13 12/14F 12/15F 12/16F Cash Flows from Op Activities 30 24 52 54 P/E (x) 48.4 45.9 17.8 16.5 Net Profit 18 15 43 47 P/CF (x) 17.1 18.2 13.7 12.7 Non-Cash Income and Expense 35 24 16 17 P/B (x) 3.9 2.8 2.7 2.3 Depreciation 3 3 2 2 EV/EBITDA (x) 16.4 13.2 11.4 9.5 Amortization 6 5 4 4 EPS (W) 913 741 2,199 2,379 Others 26 16 10 11 CFPS (W) 2,588 1,870 2,861 3,076 Chg in Working Capital -8 0 2 1 BPS (W) 11,376 12,117 14,316 16,694 Chg in AR & Other Receivables -23-2 -7-5 DPS (W) 0 0 0 0 Chg in Inventories -2 0-1 -1 Payout ratio (%) 0.0 0.0 0.0 0.0 Chg in AP & Other Payables 24 3 9 7 Dividend Yield (%) 0.0 0.0 0.0 0.0 Income Tax Paid -16-17 -12-14 Revenue Growth (%) 11.6 4.5 14.6 9.3 Cash Flows from Inv Activities -22-4 -11-8 EBITDA Growth (%) -28.6-12.0 27.3 10.7 Chg in PP&E -19 0 0 0 Operating Profit Growth (%) -32.8-12.2 38.9 12.0 Chg in Intangible Assets -4 0 0 0 EPS Growth (%) -54.2-18.8 196.8 8.2 Chg in Financial Assets -1-3 -11-8 Accounts Receivable Turnover (x) 8.1 6.1 6.4 6.3 Others 2-1 0 0 Inventory Turnover (x) 41.2 37.4 39.0 38.2 Cash Flows from Fin Activities 7 0 0 0 Accounts Payable Turnover (x) 3.3 2.9 2.9 2.9 Chg in Financial Liabilities 3 0 0 0 ROA (%) 5.0 3.6 9.8 9.4 Chg in Equity 2 0 0 0 ROE (%) 8.5 6.4 16.9 15.6 Dividends Paid 0 0 0 0 ROIC (%) 20.3 17.2 44.0 52.8 Others 2 0 0 0 Liability to Equity Ratio (%) 47.3 46.5 45.5 43.2 Increase (Decrease) in Cash 6 19 41 46 Current Ratio (%) 216.7 230.2 247.7 268.6 Beginning Balance 100 106 125 166 Net Debt to Equity Ratio (%) -49.0-54.0-61.2-66.9 Ending Balance 106 125 166 211 Interest Coverage Ratio (x) 88.9 71.9 100.1 113.5 4
APPENDIX 1 Important Disclosures & Disclaimers 2-Year Rating and Target Price History Company (Code) Date Rating Target Price (041510) 01/15/2015 Buy 50,000 11/23/2014 Buy 46,000 09/01/2014 Buy 53,000 03/03/2014 Buy 58,000 11/13/2013 Buy 60,000 08/30/2013 Buy 46,000 05/30/2013 Buy 58,000 11/23/2012 Buy 72,000 (W) 80,000 60,000 40,000 20,000 0 Jan 13 Jan 14 Jan 15 Stock Ratings Industry Ratings Buy : Relative performance of 20% or greater Overweight : Fundamentals are favorable or improving Trading Buy : Relative performance of 10% or greater, but with volatility Neutral : Fundamentals are steady without any material changes Hold : Relative performance of -10% and 10% Underweight : Fundamentals are unfavorable or worsening Sell : Relative performance of -10% 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 analyst s 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. Disclosures As of the publication date, Daewoo Securities Co., Ltd. has been acting as a financial advisor to for its treasury stock trust, and other than this, Daewoo Securities has no other special interests in the companies covered in this report. 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 Analyst s 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. 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