SM Entertainment (041510 KS) SM Entertainment

Home , BoA, Exo (group), FNC Entertainment, SM Entertainment, SM Town, TVXQ

Korea Consumer Discretionary 17 November 2015

Target price: KRW60,000 Share price (16 Nov): KRW42,900 | Up/downside: +39.9%

Initiation: China and EXO the new drivers for 2016 Kevin Jin (82) 2 787 9168  China expected to be a new growth driver for the company in 2016 [email protected]  Boy band EXO has grown big enough to replace TVXQ! Brian Cho (82) 2 787 9182  Valuation looks set to recover; initiating with a Buy (1) rating [email protected]

Investment case: SM Entertainment, one of Korea’s biggest talent Share price performance management companies, has been derated versus its domestic peers (KRW) (%) since reporting disappointing earnings in 3Q12 on a lack of new artists and 49,000 160 Yen depreciation, which in turn led to uncertainties about its earnings and 43,750 143 growth in the future. However, after stepping up its cost controls and with 38,500 125 33,250 108

Yen weakness easing, the company has achieved decent earnings over the 28,000 90 past few quarters, which has dispelled many of those concerns. With a Nov-14 Feb-15 May-15 Aug-15 Nov-15 potential new growth driver, its direct foray into China in 2016, and a new SM Ent (LHS) Relative to KOSPI (RHS) rising star act, boy band EXO, now is a good time to buy the shares, in our view. 12-month range 29,350-49,000 Market cap (USDbn) 0.76 Catalysts: Aiming to enter the Chinese market by establishing SM 3m avg daily turnover (USDm) 17.97 Shares outstanding (m) 21 China by year-end. SM China will not just be another ordinary overseas Major shareholder Soo Man, Lee (21.0%) branch, but the first case ever of a direct foray into the Chinese market by a K-POP management company. We believe the establishment of SM China Financial summary (KRW) will work as a valuation premium factor for the stock. Year to 31 Dec 15E 16E 17E Revenue (bn) 299 333 376 EXO has already grown big enough to hold dome stadium concerts in Operating profit (bn) 43 54 63 Net profit (bn) 29 37 44 Japan. EXO is currently enjoying immense popularity, not only in Korea but Core EPS (fully-diluted) 1,406 1,793 2,120 all over Asia. In November 2015, the group was ranked No.1 on Japan’s EPS change (%) 384.1 27.5 18.3 Oricon Singles Chart on the very day they released their first single in Daiwa vs Cons. EPS (%) (16.4) (5.9) (5.9) Japan. EXO also achieved No.1 spot on the weekly chart, selling 146k PER (x) 30.5 23.9 20.2 Dividend yield (%) 0.0 0.0 0.0 copies of the new single in a week – the most copies a Korean artist has DPS 0 0 0 ever sold on his or her debut in Japan. According to this initial score, EXO PBR (x) 2.6 2.3 2.0 looks very likely to succeed in Japan going forward. EV/EBITDA (x) 12.9 10.6 9.4 ROE (%) 9.4 10.2 10.6

Source: FactSet, Daiwa forecasts Valuation: We initiate coverage of SM Entertainment with a Buy rating (1) and 12-month target price of KRW60,000 which is based on a 34x 2016E PER. We use the average 12-month forward PER in 2012 when the earnings prospects for Japan were high. We believe the stock deserves to trade at the multiple at which it was trading in 2012 because of the emerging prospects for the Chinese market, which are even bigger than they were for Japan in 2012.

Risks: One of the risks is incidents that can stop artists from being promoted and marketed, such as car accidents, drug abuse or a member’s withdrawal from his or her band. To minimise such risks, SM Entertainment manages and controls artists closely. Political conflict between Korea and major countries such as Japan and China may also create anti K-POP sentiment. However, the influence of political conflict on K-POP listeners is getting weaker as music enthusiasts increasingly tend to separate culture from politics.

See important disclosures, including any required research certifications, beginning on page 22

SM Entertainment (041510 KS): 17 November 2015

Table of contents

The significance of establishing SM China ...... 6 SM China would provide potential for a valuation premium ...... 6 EXO: profits should start to take off ...... 9 EXO should be big in Japan as well ...... 9 Earnings outlook ...... 11 Initiating with Buy (1) rating and target price of KRW60,000 ...... 14 A return to stardom ...... 14 Risks to our call ...... 17 Company background ...... 18 Appendix ...... 19

SM Entertainment (041510 KS): 17 November 2015

How do we justify our view? Growth outlook Valuation Earnings revisions

Growth outlook SM Entertainment: revenue and operating margin

We forecast solid earnings growth next year backed by an (KRWbn) 400 375.7 30% increase in revenue from China. For the concert division 25.1% and SM Japan, earnings are likely to be weak due to the 330.9 287.0 299.1 absence of TVXQ! (now doing their military service); but 300 268.7 241.3 16.2% 16.7% 20% we do not anticipate earnings to slow down too severely, 15.1% 14.2% as EXO and SHINee should offset the absence of TVXQ!, 200 12.0% leading to an operating-margin improvement. We look for 10% concert subsidiary Dream Maker to post sales and 100 operating profit growth of 30% for 2016 assuming: 1) for concerts in China, Dream Maker is able to book revenue 0 0% 2012 2013 2014 2015E 2016E 2017E based on how many tickets are sold, with this change Revenue OPM partially contributing to sales volume growth (the SM China Source: Company, Daiwa forecasts effect), and 2) concert volume in ex-Japan regions increases by 20% next year.

Valuation SM Entertainment: 12-month forward PER We believe the stock deserves to trade at the PER level it (KRW) was trading at back in 2012 when the prospect of earnings 120,000 from Japan was as high, given that now the earnings 100,000 prospects for China are even greater. Now that it has 80,000 posted earnings that have been in line with, or beaten, the 60,000 consensus for a couple of consecutive quarters, we believe 40,000 the valuation discount will recover going forward as the 20,000

company regains earnings credibility in the market. 0

Jul-11 Jul-13 Jul-14 Jul-15 Jul-10 Jul-12

Jan-10 Jan-12 Jan-14 Jan-15 Jan-11 Jan-13 Price 10.0x 22.0x 34.0x 46.0x 58.0x Source: Company, Daiwa Research

Earnings revisions SM Entertainment: earnings comparison to market consensus Our operating-profit forecasts for SM Entertainment for (KRWbn) 60 2015 and 2016 are KRW42.6bn and KRW53.6bn, 53.6 51.6 50 respectively. These forecasts are close to the consensus (- 42.6 44.7 4.7% and +3.9%), which in our view indicates that our 40 forecasts are in a reasonable range. 30 However, we have not yet incorporated the potential impact 20 from SM China. We would expect to revise up our 2016E 10 and 2017E earnings after the company launches SM China, and reveals to the market in detail its long-term 0 2015E 2016E business outlook for China. Daiwa Consensus

Source: Bloomberg, Daiwa forecasts

SM Entertainment (041510 KS): 17 November 2015

Financial summary Key assumptions Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Forex 100JPY:KRW 1,321 1,391 1,413 1,123 977 935 880 850 Japan Concert Audience('000) 78 343 1,170 1,380 1,350 1,950 1,600 2,000 Ex-Japan Concert Audience('000) 259 257 466 572 580 620 750 1,000

Profit and loss (KRWbn) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E SME 86 110 169 164 169 184 200 215 SM Japan 0 0 0 0 70 74 63 71 Other Revenue 0 33 73 104 47 41 69 90 Total Revenue 86 143 241 269 287 299 333 376 Other income 0 0 0 0 0 0 0 0 COGS (49) (87) (132) (170) (185) (185) (200) (233) SG&A (12) (31) (49) (58) (68) (72) (79) (81) Other op.expenses (3) (7) (10) (9) (13) (22) (24) (22) Operating profit 25 26 61 41 34 43 54 63 Net-interest inc./(exp.) 2 2 2 2 1 (0) 0 0 Assoc/forex/extraord./others (5) (1) (5) (1) (6) (0) 0 1 Pre-tax profit 23 26 57 42 29 42 54 63 Tax (1) (4) (20) (24) (28) (13) (17) (20) Min. int./pref. div./others 0 0 0 0 0 0 0 0 Net profit (reported) 22 23 40 19 6 29 37 44 Net profit (adjusted) 22 23 40 19 6 29 37 44 EPS (reported)(KRW) 1,345 1,384 2,157 915 290 1,406 1,793 2,120 EPS (adjusted)(KRW) 1,345 1,384 2,157 915 290 1,406 1,793 2,120 EPS (adjusted fully-diluted)(KRW) 1,345 1,384 2,157 915 290 1,406 1,793 2,120 DPS (KRW) 0 0 0 0 0 0 0 0 EBIT 25 26 61 41 34 43 54 63 EBITDA 28 32 70 50 47 64 78 85

Cash flow (KRWbn) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Profit before tax 23 26 57 42 29 42 54 63 Depreciation and amortisation 3 7 10 9 13 22 24 22 Tax paid (1) (4) (20) (24) (28) (13) (17) (20) Change in working capital 4 (5) 4 8 37 11 20 3 Other operational CF items (4) 8 (3) (6) (61) (11) (8) (8) Cash flow from operations 24 32 47 30 (9) 50 73 61 Capex (2) (13) (23) (19) (26) (40) (25) (25) Net (acquisitions)/disposals (22) (4) (27) (3) 19 25 20 20 Other investing CF items (0) 0 0 0 0 0 0 0 Cash flow from investing (24) (17) (50) (22) (8) (15) (5) (5) Change in debt 0 (1) 0 10 4 31 (13) (1) Net share issues/(repurchases) 1 3 65 (4) 0 0 0 0 Dividends paid 0 0 0 0 0 0 0 0 Other financing CF items 0 0 9 1 3 5 5 5 Cash flow from financing 1 2 75 7 7 36 (8) 4 Forex effect/others 0 1 (6) (9) (4) (1) (1) (1) Change in cash 2 18 66 6 (14) 70 59 59 Free cash flow 23 19 25 11 (35) 10 48 36 Source: FactSet, Daiwa forecasts

SM Entertainment (041510 KS): 17 November 2015

Financial summary continued … Balance sheet (KRWbn) As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Cash & short-term investment 53 72 144 143 96 180 177 213 Inventory 2 3 6 7 9 10 10 10 Accounts receivable 7 14 24 45 47 58 62 65 Other current assets 10 18 25 49 44 65 60 63 Total current assets 72 106 198 245 197 313 309 351 Fixed assets 3 19 39 54 81 100 118 134 Goodwill & intangibles 4 9 43 50 51 50 52 53 Other non-current assets 36 34 42 44 54 96 103 110 Total assets 115 168 323 392 383 558 582 648 Short-term debt 3 3 3 3 3 4 3 3 Accounts payable 15 31 48 71 48 43 48 50 Other current liabilities 10 19 24 39 34 60 35 36 Total current liabilities 28 52 74 113 85 107 86 89 Long-term debt 0 1 8 11 12 40 29 28 Other non-current liabilities 1 3 2 2 4 6 5 5 Total liabilities 29 56 84 126 101 153 120 122 Share capital 8 8 10 10 10 10 10 10 Reserves/R.E./others 86 112 239 266 282 328 375 428 Shareholders' equity 86 112 239 266 282 338 385 439 Minority interests 0 2 26 36 40 67 77 87 Total equity & liabilities 115 168 323 392 383 558 582 648 EV 843 827 786 800 853 825 826 798 Net debt/(cash) (50) (68) (134) (130) (81) (136) (145) (183) BVPS (KRW) 5,282 6,774 11,698 12,901 13,637 16,362 18,640 21,244

Key ratios (%) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Sales (YoY) 39.8 65.5 68.8 11.3 6.8 4.2 11.3 12.9 EBITDA (YoY) 136.2 15.5 116.7 (28.7) (5.2) 35.5 21.0 9.4 Operating profit (YoY) 174.9 0.5 136.4 (33.0) (15.3) 24.0 26.0 16.8 Net profit (YoY) 387.7 4.4 75.3 (52.9) (68.1) 384.1 27.5 18.3 Core EPS (fully-diluted) (YoY) 383.8 2.9 55.9 (57.6) (68.3) 384.1 27.5 18.3 Gross-profit margin 43.6 39.5 45.5 36.7 35.6 38.3 39.8 38.1 EBITDA margin 32.4 22.6 29.0 18.6 16.5 21.5 23.3 22.6 Operating-profit margin 29.5 17.9 25.1 15.1 12.0 14.2 16.1 16.7 Net profit margin 25.2 15.9 16.5 7.0 2.1 9.7 11.1 11.7 ROAE 29.1 22.9 22.7 7.4 2.2 9.4 10.2 10.6 ROAA 21.5 16.1 16.3 5.3 1.5 6.2 6.5 7.1 ROCE 32.9 25.0 33.1 15.3 11.9 11.4 11.4 11.9 ROIC 72.0 52.0 44.7 11.5 1.0 11.6 12.5 13.1 Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Effective tax rate 3.6 16.6 34.5 56.7 93.8 30.6 31.4 31.0 Accounts receivable (days) 28.2 26.4 28.2 46.4 58.5 64.2 65.8 61.7 Current ratio (x) 2.6 2.0 2.7 2.2 2.3 2.9 3.6 4.0 Net interest cover (x) n.a. n.a. n.a. n.a. n.a. 173.8 n.a. n.a. Net dividend payout 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Free cash flow yield 2.5 2.2 2.8 1.2 n.a. 1.1 5.3 4.1 Source: FactSet, Daiwa forecasts

Company profile

SM Entertainment is one of the biggest K-POP management companies in Korea. The company trains and manages artists and actors, with popular artists such as EXO, TVXQ, Girl's Generation, Super Junior and others under its management.

SM Entertainment (041510 KS): 17 November 2015

The significance of establishing SM China SM China would provide potential for a valuation premium Not just another ordinary overseas branch Direct foray into the SM Entertainment is planning to enter the Chinese market by the end of this year via Chinese market establishing a headquarters in China, through setting up a JV with a Chinese partner. This new headquarters, tentatively known as “SM China”, will not just be another ordinary overseas branch, but represents the first case of a direct foray into the Chinese market ever by a Korean celebrity management company. We believe the founding of SM China will work as a valuation premium booster for the following reasons.

Should raise the volume of concert tickets sold and profitability of revenue in China In China, SM Entertainment collects concert revenue from a Chinese talent management agency every time the company holds a concert, regardless of audience volume (so on a guarantee basis). While this system may protect SM Entertainment from losses when concerts are not successful, it does not benefit the company either when concerts are successful.

Considering the marketability of SM Entertainment in China, management believes the current system is unfavourable for the company, and is therefore working on establishing a business model whereby it can book earnings based on the number of tickets sold (royalty basis), which would give it the potential to book higher earnings.

Due to the nature of the Chinese market whereby foreign companies are not allowed to do business on their own, SME is looking for a trustworthy Chinese partner to build a partnership similar to the relationship its Japanese subsidiary, SM Japan, has with AVEX in Japan. If SM Entertainment can manage concerts itself in China, the revenue and profitability it derives from concerts in China would improve as below.

1) We estimate SM Entertainment’s guarantee per ticket is much lower than the actual ticket price, and as such its sales volume would likely increase if it were to sell more tickets directly. Noting that concert ticket prices in China (at around CNY980; USD153) are more expensive than those in Korea (KRW88,000; USD76) and Japan (JPY11,000; USD92), we believe a change in accounting system would have a big impact on SM Entertainment’s earnings in the future. 2) It is better for margins to have higher audience numbers per concert than to have a greater number of concerts. However, due to the constraints of its current accounting system in China, SM Entertainment has to date been forced to hold many concerts rather than boosting audience numbers.

Comparing EXO’s concert ticket price by region

USD) 200

153.3 150

91.8 100 76.1

0 Korea Japan China

Source: Company, Daiwa ; Note: USD:KRW 1,156, JPY:USD 122, CNY:USD 6.4

SM Entertainment (041510 KS): 17 November 2015

Ticket prices in China For Japan, SM Entertainment has been doing business with AVEX, a Japanese talent are even higher management agency, for over 15 years. SM Japan collects a certain percentage (about 70-80%) of the net profit from a concert as sales. It then transfers a certain portion as COGS to SM Entertainment which is booked as overseas concert revenue for SM Entertainment. Under this “royalty” system, net income from AVEX depends on ticket sales. According to this system, margins for dome stadium concerts (audience capacity of 50,000) are usually higher than those of arena concerts (audience capacity of 15,000).

We estimate the current average guaranteed revenue to SM Entertainment per concert is around KRW1.0bn in ex-Japan regions (mainly in Asia except Korea and Japan), while under a “royalty” basis, average revenue per concert would be as much as KRW1.2bn in China. We assume this amount (ie, the KRW1.2bn) would be booked as Dream Maker’s (SM Entertainment’s concert planning subsidiary) revenue from next year. We estimate Dream Maker’s revenue would rise by 30.8% YoY and its operating profit margin increase to 17.1% in 2016 (from 16.8% in 2015) if SM Entertainment establishes a JV in China.

EXO’s concert ticket price by seat (2Q15) in China

Source: Company, Daiwa Research

Dream Maker: earnings trends and forecasts (KRWbn) 100 20% 17.1% 17.4% 80 14.9% 15.0% 16.8% 15% 60 12.1% 10% 40 5% 20

0 0% 2012 2013 2014 2015E 2016E 2017E Sales OP OPM (RHS)

Source: Company, Daiwa Research

Setting up a headquarters in China akin to capacity expansion of a “K-POP Factory” SM Entertainment is well known for its system management that nurtures and trains artists. The company is aiming to adopt this particular system in the Chinese market via SM China. In other words, apart from “exporting” artists popular in Korea to China, the company will also be able to “manufacture” and “localise” new bands that purely consist of Chinese members, and directly release their albums and singles in China. By doing so, SM Entertainment will be free of the time and space restraints previously of only being able to launch one band at a time in China and Korea (with SM China, it will be able to release

SM Entertainment (041510 KS): 17 November 2015

new bands in China and Korea at the same time), which in the past had limited its capacity. Also, as the company gains legitimacy in China, the risk of members leaving and debuting in China themselves with different Chinese agencies would be reduced; such cases have had a serious impact on SM Entertainment in the past.

SM Entertainment: sales from China (parent basis) (KRWbn) 60 30%

20.6% 18.5% 40 15.5% 20% 13.9% 9.4% 7.6% 20 10%

0 0% 2012 2013 2014 2015E 2016E 2017E China Region China Portion (RHS)

Source: Company, Daiwa forecasts

We expect business synergies with the future partner The partner with which SM Entertainment will ally itself has not yet been decided, but considering the company’s strong market position in China, it is highly likely that it will tie up with a company capable of creating significant synergies under a partnership. Depending on the partner, the synergies would be wide-reaching and not just limited to the concert business. The most likely examples in our view would be: 1) SMC&C (KS 048550), SM Entertainment’s TV show producing subsidiary, partnering with a Chinese company to produce TV shows in China together, or 2) the company selling goods in Chinese retail stores like it does in Seoul (SM Town COEX Artium). Any kinds of synergies would likely reassure the market of the potential of the Chinese market serving as SM Entertainment’s new growth driver.

MD Retail Shop, SM TOWN COEX Artium Inside SMTOWN COEX Artium

Source: Company, Daiwa Source: Company, Daiwa

SM Entertainment (041510 KS): 17 November 2015

EXO: profits should start to take off EXO should be big in Japan as well EXO ranks No.1 on the Oricon Chart in Japan on the first day Hit the No.1 spot on EXO is currently enjoying great popularity not only in Korea but all over Asia. In November debut day in Japan 2015, the band ranked No.1 in the Oricon charts in Japan on the same day they released their first single in Japan. EXO also got to No.1 in the weekly charts, selling 146,000 copies. This is the greatest number of singles sold by a Korean artist upon his or her debut in Japan. Based on these numbers, we believe EXO will continue to do well in Japan.

EXO was able to book for 8 dome stadium (a stadium with a roof) concerts (350,000 people for the 8 concerts) in 4Q15. It is rare for a foreign artist to debut in Japan and have a dome concert so soon afterwards. Not many artists can attract enough people to justify holding a concert in a dome stadium (where artists need to fill 50,000 seats). It usually takes over 5 years from debut for a K-POP artist to get to the “dome concert” level. We expect EXO to play an important role in the company’s promotions across Asia including Japan next year, contributing to earnings.

EXO EXO: a screen shot from Oricon, which reads “Ranking/ Music Ranking/Daily single rankings/ and it shows EXO is No.1 with a song called “Love me right”

Source: Company Source: Oricon

EXO’s global concert audience and its proportion of SM Entertainment’s total concert audience

('000) 2,000 60% 1,600 1,500 1,300 53.3% 40% 1,070 1,000 55.3% 41.6% 467 20% 500 24.2% - 0 0% 2013 2014 2015 2016E 2017E EXO Audience % of total SM audience

Source: Company, Daiwa forecasts

TVXQ!’s absence should be offset by EXO and SHINee EXO offers a better net We expect any loss in revenue as a result of TVXQ!’s leave of absence to do their military margin service to be offset by revenue from EXO next year. TVXQ!, currently the company’s biggest source of income, is a 2-boy band that has been around for the past 10 years and accounts for the biggest proportion of revenue among all of SM Entertainment’s artists. Despite TVXQ!’s leading positon at SM Entertainment, we forecast better margins for SM Japan and the company’s concert division next year if EXO’s sales fill in for TVXQ!’s. This is because the revenue-share ratio between the company and EXO is much lower than it is

SM Entertainment (041510 KS): 17 November 2015

with TVXQ! (EXO is a new boy band while TVXQ! has renewed its contract a couple of times and has a higher revenue-share ratio with SM Entertainment).

SHINee will also help to offset absence of revenue from TVXQ!, as SHINee is now big enough to hold dome concerts in Japan. SHINee has already booked a 16-day Arena tour in Japan, with an accumulated audience of 160,000 in 1H16. As SM Entertainment also aims to launch a couple of new boy bands in 2016, we believe impact of the absence of TVXQ! in Japan will be limited.

TVXQ!'s Japan audience and proportion of SM Entertainment’s SHINee’s concert audiences in Japan (calendar basis) total Japan concert audience

('000) ('000) 1,000 80% 300 844 250 750 800 230 57.3% 659 60% 200 200 200 550 600 200 54.1% 51.5% 40% 400 35.1% 100 20% 100 200

0 0% 2012 2013 2014 2015E 0 TVXQ Proportion(RHS) 2012 2013 2014 2015E 2016E 2017E

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

SM Japan: earnings (KRWbn) 17.7% 150 16.8% 20% 14.2% 13.3% 12.3% 15% 100 99.1 10% 84.56.2% 70.1 74.0 70.8 50 63.2 5% 17.5 11.8 5.2 9.1 8.4 10.1 0 0% 2012 2013 2014 2015E 2016E 2017E Sales OP Proportion(RHS)

Source: Company, Daiwa forecasts

SM Entertainment (041510 KS): 17 November 2015

Earnings outlook

Record high revenue For 3Q15, SM Entertainment posted a record-high revenue of KRW94.4bn (up 20.0% achieved in 3Q15 YoY), an operating profit of KRW18.7bn (up 31.5% YoY; operating margin of 19.8%) and net profit of KRW13.0bn (up 28.4% YoY), due to strong concert revenue from Japan. The company booked the largest cumulative audience for a single quarter in 3Q15.

SM Entertainment’s album sales for TVXQ!, Girls’ Generation, SHINee accounted for 45.3% of revenue growth for its music division for 3Q15. Its concert division revenue rose by 191.3% YoY, backed by more people attending its concerts in Japan (up 270% YoY), from 0.3m people for 3Q14 to 1.1m. Management sales (mainly ads) and MD sales (merchandise), however, dropped by 56% YoY due to a temporary decline from the MERS breakout this year (ie, people preferred to stay at home than go out). But as the sales volume grew, the operating margin improved, from 18.9% for 3Q14 to 19.5% for 3Q15.

SM Japan’s earnings increased for the same reasons as those above, but the operating margin fell, from 29.0% for 3Q14 to 13.2% for 3Q15 because of the high base from one-off earnings from fan club membership fees paid in Japan in 3Q14 (such fees offer a 100% net margin). SMC&C, SM Entertainment’s TV show-production subsidiary, made a slight profit with its drama productions, while its concert subsidiary Dream Maker’s revenue and operating profit were down 22.6% YoY and 11.8% YoY respectively for 3Q15, due to its different concert volume (3Q14 vs. 3Q15). Dream Maker’s operating profit, however, grew by 46.1% on accumulated basis for 1Q15-3Q15 vs. the same period in 2014.

We forecast earnings in 4Q15 to slow because the company signed up only 0.2m people for concerts in 3Q15 in Japan (there is time lag of a quarter between the company booking concerts/selling tickets in Japan and revenue for those concerts being recognised. In other words, revenue for concerts attended in 3Q is recognised in 4Q). We forecast revenue of KRW63bn (-20.5% YoY), operating profit of KRW8.4bn (-15.7% YoY, operating margin of 13.3%) and net profit of KRW5.2bn (up 17.0% YoY). SMC&C will continue to post a slightly positive operating profit, and we expect Dream Maker’s revenue to grow by 24.1% YoY and the operating profit by 33.4% YoY, backed by an increase in the number of concerts held outside of Japan.

A drop in the 4Q15E operating profit of 76% QoQ for SM Japan, however, is inevitable, in our view, because it only signed up 0.2m people for its concerts in 3Q15. This compares to the 1m people accounted for in 3Q15. Management and merchandise sales should bounce back in in 4Q15 after the MERS outbreak.

SM Entertainment: revenue trends by region (parent basis)

(KRWbn) 250

200

150

100

0 2010 2011 2012 2013 2014 2015E 2016E 2017E

Korea Japan China Region Others

Source: Company, Daiwa forecasts

SM Entertainment (041510 KS): 17 November 2015

Growth to be driven by For 2016, we forecast revenue of KRW330.9bn (+10.6% YoY), operating profit of the China market KRW53.6bn (+26.0% YoY); operating margin of 16.2%) and a net profit of KRW37.0bn (+27.5% YoY) for the following reasons:

 Music division will continue to see revenue growth on our forecasts, on the back of the growing audio streaming market and new album releases.  For its concert division and SM Japan, we expect weak earnings growth due to the absence of TVXQ!. We, however, do not expect earnings to decline because revenue from EXO should offset the shortfall left by TVXQ!’s vacancy, and this should also lead to an improvement in the net margin. We assume the aggregate Japanese audience (on a fiscal basis) will decline by 12% YoY to 1.8m people, and that the 100JPY:KRW will be 880 for 2016, according to Daiwa’s economics team.

SM Japan’s sales and JPY forex exchange rate (KRWbn) (100JPY:KRW) 120 1,413 1,600 1,400 100 1,123 1,200 977 935 80 880 1,000 60 800 600 40 400 20 200 0 0 2012 2013 2014 2015E 2016E Sales 100JPY:KRW

Source: Company, Daiwa forecasts

 We project revenue from the management and MD division to pick up from the low base effect as a result of the MERS outbreak in 2015.  SMC&C’s operating profit should expand with more TV production in both Korea and China. Additional revenue should be generated, depending on the scale of sponsorship SMC&C can secure for its TV shows in China.  Dream Maker looks likely to be the most promising division in 2016. We forecast over 50% revenue and operating profit growth YoY. We assume that: 1) for concerts in China, Dream Maker will get to book revenue based on the number of tickets sold and this change (from a guaranteed basis) will partially contribute to the sales volume growth for the year, 2) the concert volume outside Japan will increase by 20% YoY for next year, and 3) the operating margin will expand on the sales volume growth and the absence of TVXQ!.

SM Entertainment (041510 KS): 17 November 2015

SM Entertainment: earnings (KRWbn) 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15E 2014 2015E 2016E 2017E Revenue 66.9 62.2 78.7 79.3 65.4 76.1 94.4 63.1 287.0 299.1 332.9 375.7 YoY 33.8% 9.3% -4.1% -0.6% -2.2% 22.5% 20.0% -20.4% 6.8% 4.2% 11.3% 12.9% SM Ent. 37.9 36.2 47.6 47.8 41.1 48.7 59.1 35.4 169.5 184.2 200.3 214.8 Music 11.8 12.9 9.5 7.2 12.1 15.3 13.8 7.5 41.4 48.7 51.4 52.7 Concert 12.8 9.4 11.5 21.1 12.1 16.6 33.5 12.4 54.8 74.6 77.2 83.8 Management 6.2 5.0 9.8 7.8 5.4 6.3 6.9 7.0 28.8 25.6 26.2 27.7 Merchandise & Others 7.1 8.9 16.8 11.7 10.6 10.6 4.9 8.5 44.5 34.6 45.5 50.6 SM Japan 13.6 14.4 13.1 29.0 11.3 16.4 34.9 11.4 70.1 74.0 63.2 70.8 SM C&C 23.3 12.5 13.2 11.6 12.2 14.2 18.3 18.5 60.6 63.2 77.8 91.4 Dream Maker 3.4 8.6 15.9 8.7 14.5 14.1 12.3 10.8 36.6 51.7 67.6 79.8 Others & Adjustments -11.2 -9.5 -11.2 -17.8 -13.6 -17.2 -30.2 -13.0 -49.8 -74.1 -76.0 -81.0 Operating Profit 4.7 5.4 14.2 10.0 3.8 11.7 18.7 8.4 34.3 42.6 53.6 62.6 YoY -6.5% 48.4% -5.5% -40.6% -20.6% 116.2% 31.5% -15.7% -15.3% 24.0% 26.0% 16.8% Operating margin 7.1% 8.7% 18.0% 12.6% 5.8% 15.4% 19.8% 13.3% 12.0% 14.2% 16.1% 16.7% SM Ent. 4.8 3.1 9.0 6.8 4.7 7.2 11.4 4.9 23.6 28.2 34.5 38.1 Operating margin 12.6% 8.4% 18.9% 14.2% 11.5% 14.9% 19.3% 13.7% 13.9% 15.3% 17.2% 17.8% SM Japan 1.5 1.6 3.8 4.9 1.1 2.3 4.6 1.1 11.8 9.1 8.4 10.1 Operating margin 11.0% 11.1% 29.0% 16.9% 9.7% 14.0% 13.2% 9.5% 16.8% 12.3% 13.3% 14.2% SM C&C 0.5 -1.2 -1.4 -3.5 -1.8 -0.5 0.9 1.0 -5.6 -0.4 1.6 2.6 Dream Maker -1.0 1.4 3.4 1.7 0.9 2.5 3.0 2.3 5.5 8.7 11.5 13.9 Operating margin -29.4% 16.3% 21.4% 19.5% 6.2% 17.7% 24.4% 21.0% 15.0% 16.8% 17.1% 17.4% Others & Adjustments -1.0 0.6 -0.6 0.0 -1.2 0.2 -1.2 -0.8 -1.1 -3.0 -2.4 -2.0 Non-operating profit 1.2 -3.7 0.2 -2.6 -0.1 -0.7 1.0 -1.0 -5.0 -0.7 0.3 0.8 Interest 0.4 0.3 0.2 0.2 0.1 -0.1 -0.2 -0.1 1.0 -0.2 0.0 0.0 Others 0.8 -4.0 -0.1 -2.8 -0.2 -0.6 1.2 -0.9 -6.0 -0.5 0.3 0.8 Net profit 3.4 -11.9 10.1 4.4 3.2 7.0 13.0 5.9 6.0 29.0 37.0 43.8 YoY 25.4% TR -22.9% 95.2% -6.3% TB 28.4% 33.2% -68.1% 384.1% 27.5% 18.3% Net profit margin 5.1% -19.2% 12.9% 5.6% 4.9% 9.2% 13.8% 9.3% 2.1% 9.7% 11.1% 11.7% JPY:Won 10.4 10.1 9.9 9.5 9.2 9.0 9.6 9.6 10.0 9.3 8.8 8.5 YoY -11.5% -11.3% -12.1% -10.5% -11.5% -10.4% -3.3% 1.4% -13.0% -6.1% -5.9% -3.4% Japan Aud.('000) 80 170 300 800 250 500 1,000 200 1,350 1,950 1,600 2,000 ex-Japan Aud.('000) 60 160 240 120 180 170 120 150 580 620 750 1,000 Source: Company, Daiwa forecasts

SM Entertainment (041510 KS): 17 November 2015

Initiating with Buy (1) rating and target price of KRW60,000 A return to stardom Valuation discount to peers should recover Now is a good time to We initiate coverage on SM Entertainment with a Buy rating (1) and 12-month target price buy SM Entertainment, of KRW60,000, which is based on a 2016E PER of 34x. We have assigned a target PER in our view for SM Entertainment that is the same as what it was in 2012, when the market’s expectations for the company’s Japan earnings were high and the share price was at its peak. The share price fell after the company posted disappointing earnings for 3Q12, and the operating profit fell to half of what the Bloomberg consensus had expected. The company still achieved strong earnings (operating profit and EPS growth of 136.4% and 75.3% YoY respectively) for 2012. We believe the company deserves to trade at least at the same average forward PER as it was in 2012 (34x) because we see signs that the China market is on track to resume its growth trajectory, and could become bigger than the Japanese market.

SM Entertainment: forward PER when the share price was at its peak in 2012

(X) (KRW) 60 80,000

60,000 40

40,000

20 20,000

0 0 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Share Price Year-End PER (RHS)

Source: Bloomberg, Daiwa

SM Entertainment’s valuation started to be derated when it released the earnings shock in 3Q12 (consensus forecast was around KRW20bn vs. actual reported figure of KRW14.7bn). As the depreciation in the Yen has had a direct negative impact on SM Entertainment’s profitability in the past, the stock has been undervalued since then, in our view. EPS growth for 2013 and 2014 was down by 52.9% and 68.1%, respectively. But now that the company has been posting earnings that are in line with or above consensus for the first 3 quarters of 2015, we believe its valuation discount to its peers (ie, YG Entertainment or FNC Entertainment) will narrow going forward, as the company has gained back some credibility in terms of its earnings. We forecast 2015 EPS growth of 384.1% YoY, mainly due to the low-base effect of it having to pay a one-off tax in 2Q14. Also the operating profit was KRW34bn for 2014, but the company made a small profit of only KRW6bn for the same year. We forecast EPS growth of 27.5%YoY for 2016, on the back of the favourable business environment we see for the company.

SM Entertainment (041510 KS): 17 November 2015

SM Entertainment:12-month forward PER bands SM Entertainment: 12-month forward PBR bands (KRW) (KRW) 120,000 100,000 100,000 80,000 80,000 60,000 60,000 40,000 40,000 20,000 20,000

0 0

Jul-10 Jul-11 Jul-12 Jul-13 Jul-15 Jul-14

Jul-11 Jul-13 Jul-14 Jul-15 Jul-10 Jul-12

Jan-10 Jan-11 Jan-13 Jan-15 Jan-12 Jan-14

Jan-10 Jan-12 Jan-14 Jan-15 Jan-11 Jan-13 Price 10.0x 22.0x Price 2.0x 3.1x 34.0x 46.0x 58.0x 4.2x 5.3x 6.4x Source: Daiwa Source: Daiwa

Given the “hit-driven” nature of entertainment companies, it is hard for us to estimate forward earnings when artist schedules for the year ahead have not been fully disclosed. Thus, we compare the 2015E valuations for the Korean entertainment companies, rather than 2016E, as we think this is more accurate.

YG Entertainment (122870 KR, Not rated) is trading at 37x 2015E PER (KRW9.8bn from a one-off gain from the disposal of shares in Coson [069110 KR, Not rated]) and FNC Entertainment (173940 KR, Not rated) is trading at 2015E PER of 44x (both on Bloomberg consensus forecasts). SM Entertainment however is trading at what we see as an undervalued 2015E PER of 30.5x.

We believe SM Entertainment, which has just regained the title of being the No.1 company in the K-POP management sector in Korea with the biggest market cap, will maintain its solid position going forward.

Peer Group Comparison Ticker Daiwa rating Mkt cap TP Price Upside P/E (x) P/BV (x) EV/EBITDA (x) ROE (%) Company (USD $m) (Local curr) (Local curr) (%) FY15 FY16 FY15 FY16 FY15 FY16 FY15 FY16

Artist Management SM Entertainment* 041510 KQ Buy (1) 760 60,000 42,900 39.9% 30.5 23.9 2.6 2.3 11.8 10.6 9.4 10.2 YG Entertainment 122870 KQ NA 600 NA 41,050 NA 37.0 21.5 3.7 3.2 17.4 12.7 15.7 14.6 FNC Entertainment 173940 KQ NA 243 NA 19,650 NA 44.1 20.9 na na na na na na Average 37.2 22.0 3.1 2.8 14.6 11.7 12.5 12.4 Source: Bloomberg,*Daiwa forecasts for SM Entertainment; note: prices as of close on 16 November 2015

Market cap trends of SM Entertainment’s peer group (KRW) 1,200

1,000

800

600

400

200

0 1/1/2015 1/2/2015 1/3/2015 1/4/2015 1/5/2015 1/6/2015 1/7/2015 1/8/2015 1/9/2015 1/10/2015 1/11/2015 SM YG JYP FNC

Source: Bloomberg, Daiwa

SM Entertainment (041510 KS): 17 November 2015

SM Entertainment: EPS (consolidated basis) vs. share price (KRW) (KRW) 2,500 80,000

2,000 60,000

1,500 40,000 1,000

20,000 500

0 0 2010 2011 2012 2013 2014 2015E2015 2016E2016 EPS Share Price

Source: Bloomberg, Daiwa forecasts

SM Entertainment: operating profit (consolidated basis) vs. share price (x ) (KRW) 80 80,000

60 60,000

40 40,000

20 20,000

0 0 2010 2011 2012 2013 2014 2015E2015 2016E2016

OP(Con.) Share Price

Source: Bloomberg, Daiwa forecasts

SM Entertainment (041510 KS): 17 November 2015

Risks to our call

The biggest risk to our call on the stock would be if the company has to pull artists or if its artists cannot perform or carry out promotional activities due to accidents, drug abuse, and/or if artists leave their groups. In attempt to avoid this, SM Entertainment keeps a close eye on its artists to make sure they don’t get involved in such incidents.

A secondary risk would be if political tension between say Korea and Japan and China were to create an anti K-POP mood. However, we are seeing less of this as music fans tend to separate culture from political issues.

There is also the risk that China will start producing very famous boy bands of its own. In fact, there have been many Chinese boy bands showing up on the scene but we believe it will take years for these bands to replace the Korean boy bands.

SM Entertainment (041510 KS): 17 November 2015

Company background

SM Entertainment is one of the largest celebrity-management companies in Korea. It was established in 1995 and listed on the KOSDAQ in 2000. The company nurtures, trains and manages K-POP artists. We believe SM Entertainment is the only company in the world to offer such comprehensive artist management.

For 3Q15, its revenue distribution by country was as follows: 51% in Korea, 33% in Japan, and 12% in China, with most of its revenue coming from its concerts (57%) and music (album sales and streaming) (23%). Its major consolidated subsidiaries are: SM Japan (100% owned; a management agency in Japan), Dream Maker (68.5% stake; concert planner), SMC&C (40.01% stake; TV programme production), SM F&B Development (restaurant business). The company manages a number of well-known artists such as EXO, TVXQ!, Girls’ Generation, Super Junior, F(x), SHINee and Red Velvet. Its concert revenue comprises mostly an ex-Japan concert guarantee from Dream Maker, and concert and album royalties from SM Japan.

SM Entertainment started business in Japan in 2003 with female artist BOA. This was at a time when it was hard for Korean celebrities to succeed in Japan. However, after the huge success of the Korean TV drama Winter Sonata in Japan in 2003, Korean celebrities have become well known all over Asia ever.

SM Entertainment also sells souvenirs and goods at concerts and from 1Q15, the company started selling these items in a retail store called “SM Town COEX Artium” in Seoul. There is a 3D hologram concert hall and other facilities (ie, F&B) in this newly built 5-storey building.

SM Entertainment: company organisation chart

Source: Company, Daiwa

SM Entertainment (041510 KS): 17 November 2015

Appendix

SM Entertainment: size of concert audience by artist SM Entertainment: size of concert audience by region

('000) ('000) 3,000 3,000

2,500 2,500

2,000 2,000

1,500 1,500

1,000 1,000

500 500

0 0 2011 2012 2013 2014 2015E 2011 2012 2013 2014 2015E SM Town SHINee Girls' Generation Super Junior TVXQ EXO Others Korea Japan China Region Other Asia Others

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

SM Entertainment: one of its Japan concerts 3D Hologram Theatre in SM TOWN Artium in Korea

Source: Company Source: Company

Explanations of SM Entertainment’s sales divisions  Music: this sub-segment had sales of KRW41bn in 2014. Revenues are generated by album sales and online music streaming. Operating margins are in the range of 10- 15%.  Concerts: the largest sub-segment of SM Entertainment with 2014 revenues of KRW55bn. Revenue recognition by concerts in and out of Korea. It is mainly from appearance fees from Dream Maker (concert revenues from ex-Japan area) and SM Japan (concert revenues from Japan). Key earnings drivers are concert schedules and venues. Operating margins are in the range of 10-20%  Management: this sub-segment had total sales of KRWKRW29bn in 2014. It is a slightly more complex revenue stream consisting of appearance fees from advertisement, interviews, TV shows, etc. Operating margins are in the range of 20-30%.  Merchandising & Others: this sub-segment generated revenues of KRW45bn in 2014 through the sale of merchandising products such as T-shirts, notepads, etc. Operating margins are in the range of 5-10%.

SM Entertainment (041510 KS): 17 November 2015

Daiwa’s Asia Pacific Research Directory HONG KONG SOUTH KOREA Takashi FUJIKURA (852) 2848 4051 [email protected] Sung Yop CHUNG (82) 2 787 9157 [email protected] Regional Research Head Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Kosuke MIZUNO (852) 2848 4949 / [email protected] Shipbuilding; Steel (852) 2773 8273 Mike OH (82) 2 787 9179 [email protected] Regional Research Co-head Banking; Capital Goods (Construction and Machinery) John HETHERINGTON (852) 2773 8787 [email protected] Iris PARK (82) 2 787 9165 [email protected] Regional Deputy Head of Asia Pacific Research Consumer/Retail Rohan DALZIELL (852) 2848 4938 [email protected] SK KIM (82) 2 787 9173 [email protected] Regional Head of Product Management IT/Electronics – Semiconductor/Display and Tech Hardware Kevin LAI (852) 2848 4926 [email protected] Thomas Y KWON (82) 2 787 9181 [email protected] Chief Economist for Asia ex-Japan; Macro Economics (Regional) Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Game Junjie TANG (852) 2773 8736 [email protected] Kevin JIN (82) 2 787 9168 [email protected] Macro Economics (China) Small/Mid Cap Jonas KAN (852) 2848 4439 [email protected] Head of Hong Kong and China Property TAIWAN Cynthia CHAN (852) 2773 8243 [email protected] Rick HSU (886) 2 8758 6261 [email protected] Property (China) Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design Leon QI (852) 2532 4381 [email protected] (Regional) Banking (Hong Kong/China); Broker (China); Insurance (China) Christie CHIEN (886) 2 8758 6257 [email protected] Anson CHAN (852) 2532 4350 [email protected] Banking; Insurance (Taiwan); Macro Economics (Regional) Consumer (Hong Kong/China) Steven TSENG (886) 2 8758 6252 [email protected] Jamie SOO (852) 2773 8529 [email protected] IT/Technology Hardware (PC Hardware) Gaming and Leisure (Hong Kong/China) Christine WANG (886) 2 8758 6249 [email protected] Dennis IP (852) 2848 4068 [email protected] IT/Technology Hardware (Automation); Pharmaceuticals and Healthcare; Consumer Power; Utilities; Renewables and Environment (Hong Kong/China) Kylie HUANG (886) 2 8758 6248 [email protected] John CHOI (852) 2773 8730 [email protected] IT/Technology Hardware (Handsets and Components) Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap Helen CHIEN (886) 2 8758 6254 [email protected] Kelvin LAU (852) 2848 4467 [email protected] Small/Mid Cap Head of Automobiles; Transportation and Industrial (Hong Kong/China) Brian LAM (852) 2532 4341 [email protected] INDIA Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Transportation – Railway; Construction and Engineering (China) Jibo MA (852) 2848 4489 [email protected] Head of India Research; Strategy; Banking/Finance Saurabh MEHTA (91) 22 6622 1009 [email protected] Head of Custom Products Group Thomas HO (852) 2773 8716 [email protected] Capital Goods; Utilities

Custom Products Group SINGAPORE Ramakrishna MARUVADA (65) 6499 6543 [email protected] PHILIPPINES Bianca SOLEMA (63) 2 737 3023 [email protected] Head of Singapore Research; Telecommunications (China/ASEAN/India) Utilities and Energy Royston TAN (65) 6321 3086 [email protected]

Oil and Gas; Capital Goods David LUM (65) 6329 2102 [email protected] Property and REITs Shane GOH (65) 64996546 [email protected] Small/Mid Cap (Singapore) Jame OSMAN (65) 6321 3092 [email protected] Telecommunications (ASEAN/India); Pharmaceuticals and Healthcare; Consumer (Singapore)

SM Entertainment (041510 KS): 17 November 2015

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SM Entertainment (041510 KS): 17 November 2015

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The following explains the rating system in the report as compared to KOSPI, based on the beliefs of the author(s) of this report.

"1": the security could outperform the KOSPI by more than 15% over the next 12 months, unless otherwise stated. "2": the security is expected to outperform the KOSPI by 5-15% over the next 12 months, unless otherwise stated. "3": the security is expected to perform within 5% of the KOSPI (better or worse) over the next 12 months, unless otherwise stated. "4": the security is expected to underperform the KOSPI by 5-15% over the next 12 months, unless otherwise stated. "5": the security could underperform the KOSPI by more than 15% over the next 12 months, unless otherwise stated.

“Positive” means that the analyst expects the sector to outperform the KOSPI over the next 12 months, unless otherwise stated. “Neutral” means that the analyst expects the sector to be in-line with the KOSPI over the next 12 months, unless otherwise stated. “Negative” means that the analyst expects the sector to underperform the KOSPI over the next 12 months, unless otherwise stated.

Additional information may be available upon request.

Singapore This research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of investors, Daiwa Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital Markets Singapore Limited’s interest and/or its representative’s interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets Singapore Limited in respect of any matter arising from or in connection with the research.

Australia This research is distributed in Australia by Daiwa Capital Markets Australia Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act.

SM Entertainment (041510 KS): 17 November 2015

Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research.

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There is no material disciplinary action against Daiwa India by any regulatory authority impacting equity research analysis activities as of the date of this report.

Taiwan This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd and it may only be distributed in Taiwan to institutional investors or specific investors who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd in respect of any matter arising from or in connection with the research.

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Thailand This research is distributed to only institutional investors in Thailand primarily by Thanachart Securities Public Company Limited (“TNS”). This report is prepared by analysts who are employed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates. This report is provided to you for informational purposes only and it is not, and is not to be construed as, an offer or an invitation to make an offer to sell or buy any securities. Neither Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees accept any liability whatsoever for any direct or consequential loss arising from any use of this research or its contents. The information and opinions contained herein have been compiled or arrived at from sources believed to be reliable. However, Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees make no representation or warranty, express or implied, as to their accuracy or completeness. Expressions of opinion herein are subject to change without notice. The use of any information, forecasts and opinions contained in this report shall be at the sole discretion and risk of the user. Daiwa Securities Group Inc. and/or its non-U.S. affiliates perform and seek to perform business with companies covered in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates, their respective directors, officers, servants and employees may have positions and financial interest in securities mentioned in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this research. Therefore, investors should be aware of conflict of interest that may affect the objectivity of this research.

United Kingdom This research report is produced by Daiwa Securities Co. Ltd. and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange and Eurex. This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory.

Germany This document is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany.

Bahrain This research material is distributed in Bahrain by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113

United States This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (Tel no. 212-612-7000).

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Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.

Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.

The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months.

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Disclosure of investment ratings Rating Percentage of total Buy* 63.8% Hold** 22.2% Sell*** 14.0% Source: Daiwa Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 30 September 2015. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings.

Additional information may be available upon request.

Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)

If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items.  In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.  In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.  For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.  There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.  There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.  Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us.

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