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September 29, 2011 Company Report

SM Entertainment (041510 KQ) Entertainment

K-pop wave to sweep from through the Americas Chang-kwean Kim +822-768-4321 [email protected]

Raise TP to W57,000 to reflect our higher earnings estimates Jee-hyun Moon We reiterate our Buy call on SM Entertainment and raise our target price to W57,000 +822-768-3615 (from W42,000). We revised up our 2011 and 2012 EPS estimates by 6.4% and [email protected]

15.3%, respectively, to reflect the companyÊs greater-than-expected success in Japan as well as the benign environment (e.g., yen appreciation). In addition, the music industryÊs 2012F average P/E (a proxy for SMÊs valuation) increased, as related music companiesÊ shares rose. We maintain our assumption for SMÊs 2011 Japanese sales volume (630,000 copies)·which is a key earnings driver·while raising our 2012 and 2013 assumptions to 2.51mn copies (from 2.19mn copies) and 2.82mn copies (from Buy (Maintain) 2.38mn copies), respectively. Although Japanese album sales stagnated for more Target Price (12M, W) 57,000 than a quarter in 2011 in the wake of the earthquake, SMÊs Japanese album sales Share Price (11/09/28,W) 43,550 have thus far reached 1.61mn copies (excluding the TVXQ album released on Expected Return (%) 30.9 September 28th), vs. 940,000 copies in 2009. In 2011, SMÊs artists are expected to EPS Growth (11F, %) -14.7 attract 545,000 fans to Japanese concerts (vs. 374,000 fans in 2009). The number of Market EPS Growth (11F, %) 6.4 P/E(11F, x) 38.0 concert attendees is likely to double in 2012, given that TVXQ is scheduled to Market P/E(11F, x) 9.2 embark on an arena concert tour (estimated to attract 228,000 fans) in 1Q12. KOSDAQ 434.20 Market Cap (Wbn) 722 Earnings momentum likely to continue through 2012 Shares Outstanding (mn) 17 In 3Q, SM is believed to have begun generating robust earning momentum from Avg Trading Volume (60D, '000) 1,194 Japan, as the company resumed staging highly profitable Japanese concerts (which Avg Trading Value (60D, Wbn) 40 were put on hold in July 2009) in December 2010 (there is a time lag between Dividend Yield (11F, %) 0.0 Free Float (%) 75.6 concerts and the recognition of related sales). In addition, GirlsÊ Generation is 52-Week Low 14,200 scheduled to release a domestic full-length album on October 4th, which brightens 52-Week High 46,050 the companyÊs 2H earnings outlook. We project SMÊs 3Q revenues and operating Beta (12M, Daily Rate of Return) 0.6 profit to reach W23.4bn and W5.3bn in 3Q and W27.9bn and W11.3bn in 4Q. Price Return Volatility (12M 3.9 Daily, %,SD) Foreign Ownership 4Q New York and South American concerts to confirm global competitiveness 8.1 (%) In June, SM Town concerts in Paris confirmed SMÊs potential in Europe, the worldÊs Major Shareholder(s) largest music market. Going further, SM is about to test its long-term potential in the Soo-man Lee (24.39%) worldÊs second-largest market by holding concerts in the U.S. and in South America Partners Venture Capital and et. al (7.24%) (tentatively in Peru). Once the company can confirm its competitiveness in the KB Asset Mgmt. (6.94%) Price Performance Americas in 4Q, the companyÊs value should skyrocket. (%) 1M 6M 12M Absolute 37.4 149.6 145.4 Relative 40.5 165.8 152.5 § Earnings & Valuation Metrics

FY Revenues OP OP Margin NP EPS EBITDA FCF ROE P/E P/B EV/EBITDA Share price (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (x) (x) (x) 290 KOSDAQ 12/09 62 9 15.0 5 278 12 10 7.3 16.2 1.2 3.5 240 12/10 86 26 29.5 22 1,342 28 26 29.1 12.6 3.3 8.1 12/11F 92 21 22.8 19 1,145 25 16 19.2 38.0 6.9 26.1 190

12/12F 166 69 41.4 59 3,566 72 47 42.0 12.2 4.4 8.5 140 12/13F 184 81 43.8 71 4,288 83 63 34.6 10.2 3.1 6.6 90 Note: All figures are based on non-consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates 40 9/10 1/11 5/11 9/11

Please read carefully important disclosures at the end of this report. September 29, 2011 SM Entertainment

Table 1. Annual earnings forecasts (Wbn,%) 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F Sales 20.7 29.3 31.3 40.1 61.8 86.4 91.9 166.4 183.9 CD 7.5 8.8 8.9 10.8 14.6 14.9 16.0 16.8 17.6 Digital music 1.9 4.0 4.4 4.8 9.5 8.5 7.2 9.4 13.3 Overseas 6.0 4.8 5.6 8.6 15.8 36.8 37.2 107.2 118.1 CD 0.1 0.3 0.7 0.8 0.7 1.2 2.2 2.7 2.8 Royalty 5.8 4.5 5.0 7.8 15.0 35.6 34.9 104.5 115.4 Management 5.4 11.7 12.4 16.0 21.9 26.2 31.6 33.0 34.8 Sales breakdown CD 36.2 29.9 28.4 26.9 23.7 17.3 17.4 10.1 9.6 Digital music 9.0 13.7 14.0 11.9 15.3 9.8 7.9 5.6 7.2 Overseas 28.8 16.5 18.0 21.4 25.5 42.6 40.4 64.4 64.3 Management 26.0 39.9 39.6 39.8 35.5 30.3 34.3 19.9 18.9 sold (Â000) 1,011 1,182 1,201 1,283 1,741 1,777 1,900 2,000 2,100 ASP (W) 7,400 7,400 7,400 8,400 8,400 8,400 8,400 8,400 8,400 Digital/CD sales 24.9 45.7 49.4 44.3 64.8 57.0 45.4 55.7 75.4 Management/CD sales 71.8 133.5 139.7 148.0 149.7 175.4 197.7 196.6 197.1 COGS 15.6 25.4 29.1 35.8 41.8 48.7 55.3 79.8 84.2 Gross profit 6.5 4.5 4.2 7.6 20.0 37.7 36.6 86.5 99.7 Gross profit margin 29.4 15.1 12.5 17.5 32.3 43.6 39.8 52.0 54.2 Operating profit 1.2 -2.3 -3.7 -1.7 9.3 25.5 21.0 68.9 80.6 OP margin 5.6 -7.7 -21.4 10.4 9.9 26.2 22.8 41.4 43.8 Pretax profit 1.1 -2.9 -7.1 4.5 6.1 22.6 18.1 74.4 88.4 Pretax margin 5.2 -9.6 -21.4 10.4 9.9 26.2 19.7 44.7 48.1 Net profit 1.2 -4.0 -7.6 4.3 4.5 21.8 18.9 58.8 70.7 Net margin 5.4 -13.5 -23.0 9.8 7.2 25.2 20.5 35.3 38.5 YoY growth Sales 41.6 7.1 27.9 54.1 39.9 6.4 81.0 10.5 CD 17.0 1.6 21.3 35.7 2.1 6.9 5.3 5.0 Digital music 115.1 9.7 8.9 98.1 -10.2 -14.9 29.3 42.1 Overseas -19.0 17.0 52.0 84.1 133.1 1.1 188.3 10.2 Management 117.5 6.3 28.4 37.3 19.6 20.5 4.7 5.3 Operating profit TTR RR RR TTB 174.9 -17.6 228.4 17.0 Net profit TTR RR TTB 4.5 387.7 -13.4 211.4 20.2 Note: On a non-consolidated basis under K-IFRS since 2011 Source: Company data, KDB Daewoo Securities Research

Table 2. 2011~2012 Earnings forecast revisions (Wbn, W, %) Previous Revised % Diff. 2011F 2012F 2011F 2012F 2011F 2012F Sales 91.9 154.3 91.9 166.4 0.0 7.8 Operating profit 20.2 61.1 21.0 68.9 3.9 12.8 Net profit 17.8 51.0 18.9 58.8 6.1 15.3 EPS 1,077 3,094 1,145 3,566 6.4 15.3 OP margin 22.0 39.6 22.8 41.4 Net margin 19.4 33.1 20.5 35.3 Note: On a non-consolidated basis under K-IFRS Source: KDB Daewoo Securities Research

Daewoo Securities Research 2 September 29, 2011 SM Entertainment

Table 3. Overseas sales assumptions (%, Wbn, Â000 copies) 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F Market share 0.4 0.3 0.4 0.5 1.1 3.3 2.2 8.7 9.8 Royalties from Japan 3.7 3.0 3.5 5.3 9.7 28.3 27.4 96.4 106.3 Sales from Japan 18.3 14.8 17.4 26.4 48.6 141.5 91.4 321.5 354.5 Sales from other countries 2.3 1.9 2.2 3.3 6.1 8.5 9.8 10.7 11.8 # of CDs sold in Japan TVXQ (5) 300 940 - - - GirlsÊ Generation - - 350 940 940 SHINee - - - 310 470 - - - 310 470 TVXQ (2) - - 280 940 940 Total 300 940 630 2,510 2,820 Source: KDB Daewoo Securities Research

Table 4. Release schedules in Korea and overseas (copies, seats) GirlsÊ Super Date BoA TVXQ SHINee f(x) Others Korea Japan and overseas Generation Junior 1Q11 1/5/11 Single: Why? [Special Ver.] 230,922 1/12/11 Single: Why? [Normal Ver.] Concert: SM Town Live (Yoyogi 1/25/11~1/26/11 26,000 park) 1/26/11 288,023 Single: Why? 2/7/11 Pictorial GirlsÊ Generation DVD Preview 2/18/11~2/20/11 36,000 Concert: 3 3/16/11 55,234 Single: Why? repackage 2Q11 4/20/11 58,419 ALBUM1: Pinocchio 4/27/11 159,568 Single: Mr.taxi, RDR 5/31/11~7/18/11 114,000 Concert: Arena Tour 6/1/11 800,000 Album: Girls' Generation 6/8/11 100,000 Single: 6/10/11~6/11/11 14,000 Album: Hot Summer repackage 6/14/11 26,616 Single: Replay 6/22/11 108,721 Digital Single: Close Ur Mouth 6/22/11 M&D Single: Why? [Special Ver.] 3Q11 7/8/11 CSJH Digital Single: One More Chance 7/20/11 172,320 Single: Superstar 7/22/11~8/11/11 9,441 Concert: Debut Reception Concert: Girls' Generation in 7/23/11~7/24/11 20,000 8/3/11 150,000 ALBUM5: Mr. Simple 8/23/11 TBC DVD: The 1st ASIA TOUR 8/24/11 TBC Mini album: Super Junior-M, Perfection 8/29/11 111,607 Single: Juliet 9/2/11~9/4/11 150,000 Concert: SM Town Live in Concert: Girls' Generation in 9/10/11~9/11/11 31,000 9/28/11 TBC ALBUM: TONE 4Q11 10/4/11 TBR ALBUM: The Boys 10/23/11 15,000 Concert: SM Town Live in New York 10/27/11 10,000 Concert: Nagoya 11/**/11 TBC Concert: SM Town Live in Peru 11/24/11~11/25/11 32,000 Concert: Osaka 12/10/11~12/11/11 72,000 Concert: Super Show 4 in Osaka 1Q12 1/18/12~3/18/12 228,000 Concert: Arena Tour 1/**/12 TBR To make a debut in Japan Note: 4Q11 and 1Q12 Schedules are provided by the company and are subject to change; Data of CDs sold after June 2011 official total quoted from RIAJ and the Japanese press (as of July 12), Source: Company data, RIAJ, Japan, Gaon Chart Korea, KDB Daewoo Securities Research Daewoo Securities Research 3 September 29, 2011 SM Entertainment

Table 5. CD sales volume of SMÊs major performing artists in Japan (copies) GirlsÊ Release date BoA TVXQ SHINee Super Junior Title Generation 5/30/01 40,470 ID; Peace B 7/25/01 59,450 12/5/01 77,220 氣持ちはつたわる 1/17/02 179,590 LISTEN TO MY HEART 3/13/02 84,430 Every Heart-ミンナノキモチ 3/13/02 931,742 ALBUM1: LISTEN TO MY HEART 5/29/02 20,580 Don't start now 8/28/02 202,000 VALENTI 9/19/02 122,440 奇蹟ㆍNO.1 12/11/02 151,485 JEWEL SONG-BESIDE YOU-僕を呼ぶ声- 1/29/03 1,249,197 ALBUM2: VALENTI 5/14/03 144,264 Shine We Are! : Earthsong 10/22/03 82,395 DOUBLE 12/3/03 58,314 Rock With You 1/15/04 653,630 ALBUM3: LOVE & Honesty 2/11/04 24,292 Be the one 9/1/04 82,614 QUINCY 11/25/04 4,710 HUG 12/1/04 136,725 メリクリ 2/2/05 1,099,720 ALBUM: BEST1 3/30/05 169,542 4/27/05 10,166 Stay With Me Tonight 7/13/05 10,496 Somebody To Love 8/31/05 54,453 11/23/05 58,436 抱きしめる 11/2/05 16,615 My Destiny 1/18/06 74,744 Everlasting 2/15/06 427,871 ALBUM4: 3/8/06 11,484 明日は 來るから 3/23/06 59,055 ALBUM1: Heart, Mind and Soul 4/5/06 90,936 七色の明日∼brand new beat∼-Your Color 4/19/06 7,672 Rising Sun-Heart,Mind and Soul 6/21/06 17,283 Begin 8/9/06 40,943 KEY OF HEART-DOTCH 8/16/06 26,890 Sky 11/1/06 99,078 11/8/06 29,226 Miss you, O-正-反-合 1/17/07 348,093 ALBUM5: MADE IN 20 1/24/07 29,144 Step by Step 3/7/07 28,116 Choosey Lover 3/14/07 86,677 ALBUM2: Five in the Black 4/25/07 42,789 6/13/07 50,074 Lovin' you 8/1/07 124,829 SUMMER ~Summer Dream-Song for you-Love in the Ice~ 9/19/07 41,978 SHINE-Ride on 9/26/07 43,524 LOVE LETTER 11/14/07 50,781 Forever Love 12/12/07 28,128 12/19/07 39,595 Together 1/16/08 48,543 Purple Line 1/23/08 158,524 ALBUM3: T 2/6/08 27,116 Two hearts-WILD SOUL 2/13/08 32,983 Runaway 2/20/08 15,636 be with you

Daewoo Securities Research 4 September 29, 2011 SM Entertainment

GirlsÊ Release date BoA TVXQ SHINee Super Junior Title Generation 2/27/08 185,338 ALBUM6: THE FACE 2/27/08 32,939 If Rainy Night 3/5/08 21,037 Close to you 3/12/08 29,122 Keyword-Maze 4/23/08 121,771 Beautiful you-千年恋歌 6/4/08 28,916 Vivid ~Kissing you,Sparkling,Joyful Smile~ 7/16/08 120,890 どうして君を好きになってしまったんだろう? 10/15/08 91,270 呪文-- 1/21/09 110,717 Bolero-Kiss The Baby Sky-忘れないで 2/18/09 22,354 永遠／UNIVERSE 3/11/09 100,313 Survivor 3/18/09 132,570 ALBUM: BEST2, BEST&USA 3/25/09 317,314 ALBUM4: The Secret Code 4/22/09 180,826 Share The World! 7/1/09 233,057 10/28/09 13,898 BUMP BUMP! 12/9/09 50,613 まもりたい ~White Wishes~ 1/27/10 289,412 BREAK OUT! 2/10/10 59,408 ALBUM7: IDENTITY 2/17/10 560,113 ALBUM: 3/24/10 228,448 時ヲ止メテ 7/21/10 12,459 8/11/10 138,302 New Beginning of Girls' Generation 9/8/10 146,540 Single1: Genie 10/20/10 200,392 Single2: Gee 12/22/10 134,664 Hoot license 1/26/11 284,410 Why? 4/27/11 159,568 Single3: Mr.taxi, RDR 6/1/11 800,000 ALBUM1: Girls' Generation 6/8/11 100,000 Single1: Bonamana 6/22/11 100,000 Single1: Replay 7/20/11 172,320 Superstar 8/23/11 TBC DVD: The 1st ASIA TOUR 'Into The New World' 8/24/11 TBC Mini album: Super Junior-M, Perfection 8/29/11 111,607 Single: Juliet 9/28/11 TBC ALBUM: TONE Note: Unofficial figures; Only includes CDs released and sold in Japan; 2H11 plans are provided by the company Source: Company data, RIAJ, Oricon Japan, Wikipedia Korea, Bestiz.net, All Kpop (allkpop.com), Daum Blog (music25, enhw4295-), Egloos Blog (yurui), KDB Daewoo Securities Research

Daewoo Securities Research 5 September 29, 2011 SM Entertainment

Table 6. Concerts of SMÊs major artists in Japan and overseas (seats) Date BoA TVXQ GirlsÊ Generation SHINee Super Junior Joint concert Place 3/27/03 2,700 Osaka 3/28/03 2,700 Osaka 3/30/03 3,012 Nagoya 3/31/03 3,012 Nagoya 4/5/03 13,000 Tokyo 4/6/03 13,000 Tokyo 3/20/04 37,000 Saitama 3/21/04 37,000 Saitama 3/26/04 10,000 Nagoya 3/27/04 10,000 Nagoya 4/3/04 11,000 Fukuoka 4/10/04 16,000 Osaka 4/11/04 16,000 Osaka 4/17/04 17,000 4/18/04 17,000 Yokohama 4/2/05 15,000 Fukuoka 4/7/05 13,000 Tokyo 4/9/05 13,000 Tokyo 4/10/05 13,000 Tokyo 4/16/05 16,000 Osaka 4/17/05 16,000 Osaka 4/23/05 10,000 Nagoya 4/24/05 10,000 Nagoya 5/13/06 500 Sapporo 5/18/06 1,500 Osaka 5/20/06 1,500 Osaka 5/21/06 1,700 Yokohama 5/22/06 1,700 Yokohama 5/23/06 800 Fukuoka 5/24/06 1,000 Nagoya 5/25/06 600 Niigata 5/26/06 700 Tokyo 5/27/06 2,700 Tokyo 5/28/06 2,700 Tokyo 9/29/06 2,000 Nagoya 9/30/06 2,000 Nagoya 10/7/06 2,000 Fukuoka 10/8/06 2,000 Fukuoka 10/13/06 2,000 Osaka 10/14/06 2,000 Osaka 10/17/06 2,000 Tokyo 10/18/06 2,000 Tokyo 10/21/06 2,000 Sendai 10/22/06 2,000 Sendai 10/28/06 2,000 Sapporo 10/29/06 2,000 Sapporo 11/5/06 2,000 Tokyo 3/31/07 17,000 Yokohama 4/1/07 17,000 Yokohama 4/7/07 15,000 Fukuoka 4/14/07 16,000 Osaka 4/15/07 16,000 Osaka 4/21/07 10,000 Nagoya 4/22/07 10,000 Nagoya

Daewoo Securities Research 6 September 29, 2011 SM Entertainment

Date BoA TVXQ GirlsÊ Generation SHINee Super Junior Joint concert Place 5/10/07 2,222 Nakano 5/12/07 2,400 Osaka 5/13/07 2,400 Osaka 5/16/07 1,730 Niigata 5/18/07 2,084 Tokyo 5/19/07 2,084 Tokyo 5/23/07 1,000 Sapporo 5/27/07 1,300 Sendai 5/29/07 2,100 Kobe 5/31/07 1,800 Shiga 6/2/07 2,500 Nagoya 6/3/07 2,500 Nagoya 6/15/07 2,300 Fukuoka 6/16/07 2,300 Fukuoka 6/18/07 14,900 Tokyo 6/19/07 14,900 Tokyo 3/19/08 17,000 Yokohama 3/20/08 17,000 Yokohama 3/26/08 16,000 Osaka 3/27/08 16,000 Osaka 3/29/08 16,000 Osaka 3/30/08 16,000 Osaka 4/1/08 11,093 Fukuoka 4/12/08 10,000 Hiroshima 4/13/08 10,000 Hiroshima 4/15/08 10,000 Nagoya 4/16/08 10,000 Nagoya 4/19/08 7,000 Sendai 4/20/08 7,000 Sendai 4/26/08 11,500 Sapporo 5/3/08 37,000 Saitama 5/5/08 37,000 Saitama 5/6/08 37,000 Saitama 5/8/08 1,527 Ichihara 5/10/08 2,488 Kanagawa 5/11/08 2,488 Kanagawa 5/15/08 3,012 Nagoya 5/16/08 3,012 Nagoya 5/21/08 1,730 Niigata 5/23/08 2,200 Toyama 5/28/08 2,001 Hiroshima 5/30/08 2,754 Osaka 5/31/08 2,754 Osaka 6/5/08 2,336 Shizuoka 6/6/08 2,112 Kobe 6/13/08 2,372 Sendai 6/17/08 1,966 Oita 6/18/08 2,316 Fukuoka 6/20/08 2,001 Kagawa 6/22/08 1,848 Shiga 6/26/08 2,505 Saitama 6/28/08 5,012 Tokyo 6/29/08 5,012 Tokyo

Daewoo Securities Research 7 September 29, 2011 SM Entertainment

Date BoA TVXQ GirlsÊ Generation SHINee Super Junior Joint concert Place 5/4/09 9,000 Kobe 5/5/09 9,000 Kobe 5/9/09 37,000 Saitama 5/10/09 37,000 Saitama 5/16/09 7,063 Sendai 5/17/09 7,063 Sendai 5/23/09 12,000 Hokkaido 5/24/09 12,000 Hokkaido 5/30/09 15,000 Fukuoka 5/31/09 15,000 Fukuoka 6/6/09 10,000 Hiroshima 6/7/09 10,000 Hiroshima 6/10/09 16,000 Osaka 6/11/09 16,000 Osaka 6/13/09 16,000 Osaka 6/14/09 16,000 Osaka 6/18/09 10,000 Nagoya 6/20/09 10,000 Nagoya 6/21/09 10,000 Nagoya 7/4/09 50,000 Tokyo Dome 7/5/09 50,000 Tokyo Dome 12/7/10 13,000 Tokyo 1/25/11 13,000 Tokyo 1/26/11 13,000 Tokyo 2/18/11 12,000 Yokohama 2/19/11 12,000 Yokohama 2/20/11 12,000 Yokohama 5/31/11 16,000 Osaka 6/1/11 16,000 Osaka 6/4/11 37,000 Saitama 6/5/11 37,000 Saitama 6/10/11 7,000 Paris, France 6/10/11 7,000 Paris, France 6/17/11 13,000 Tokyo 6/18/11 13,000 Tokyo 6/28/11 13,000 Tokyo 6/29/11 13,000 Tokyo 7/2/11 10,000 Hiroshima 7/3/11 10,000 Hiroshima 7/6/11 10,000 Nagoya 7/7/11 10,000 Nagoya 7/17/11 11,000 Fukuoka 7/18/11 11,000 Fukuoka 7/22/11 450 Fukuoka 7/23/11 2,000 Kansai 7/27/11 2,000 Tokyo 7/28/11 2,000 Tokyo 8/8/11 700 Sapporo 8/11/11 2,291 Nagoya 9/3/11 50,000 Tokyo Dome 9/4/11 50,000 Tokyo Dome 9/5/11 50,000 Tokyo Dome 9/10/11 15,000 , Taiwan 9/11/11 15,000 Taipei, Taiwan 10/23/11 15,000 New York, the U.S. 10/27/11 Nagoya 11/**/11 TBC Peru

Daewoo Securities Research 8 September 29, 2011 SM Entertainment

Date BoA TVXQ GirlsÊ Generation SHINee Super Junior Joint concert Place 11/24/11 16,000 Osaka 11/25/11 16,000 Osaka 12/10/11 36,000 Osaka 12/11/11 36,000 Osaka 1/18/12 17,000 Yokohama 1/19/12 17,000 Yokohama 1/25/12 10,000 Nagoya 1/26/12 10,000 Nagoya 2/11/12 15,000 Fukuoka 2/12/12 15,000 Fukuoka 2/18/12 10,000 Niigata 2/23/12 10,000 Sapporo 3/3/12 10,000 Hiroshima 3/9/12 8,000 Fukui 3/13/12 16,000 Osaka 3/14/12 16,000 Osaka 3/17/12 37,000 Saitama 3/18/12 37,000 Saitama Note: Unofficial figures; Concert hall seating capacities can vary by seating plan (Osaka Hall's maximum capacity is 6,200 seats for A type, 11,200 seats for B type, and 16,000 seats for C type), Source: Wikipedia Korea, JNTO, SHINee Japanese official website (shinee.jp), Naver Blog (guduri44, forgotten_13), Egloos Blog (yurui), KDB Daewoo Securities Research

Table 7. Global major music companiesÊ earnings forecasts and valuations (2011F) (Local currency, %, x) Company Sales OP NP Share price ROE EPS EPSG P/E OP margin Net margin SM 91.9 21.0 18.9 43,550 19.2 1,145 -14.7 38.0 22.8 20.5 YG* 89.4 19.3 14.4 32,000 25.1 2,888 10.4 11.1 21.6 16.1 Loen 152.9 27.9 19.4 13,600 25.0 765 98.1 17.8 18.2 12.7 Neowiz Internet 53.1 7.1 6.4 13,850 15.8 341 -49.8 40.6 13.3 12.0 KT Music 42.7 0.8 0.5 2,440 -- 16 -21.7 154.5 1.8 1.1 Avex (JP) 122 12 6 928 16.5 136 -- 6.8 10.0 4.9 Realnetworks (US) 357 -12 -19 8.33 -6.6 -0.60 TTR -- -3.4 -5.3 Domestic average 21.3 26.9 17.7 13.8 Overseas average 4.9 6.8 3.3 -0.2 Global average 13.1 16.8 12.1 8.8 Note: SM is on a non-consolidated basis under K-IFRS; *YG data = 2 x 1H11 earnings on consolidated basis under K-IFRS; YGÊs share price = top of IPO range; Other Korean companies are on a parent-based under K-GAAP; All units are in billions (Korea, Japan) and millions (the others) except for per share data Source: Thomson Reuters, KDB Daewoo Securities Research

Table 8. Global major music companiesÊ earnings forecasts and valuations (2012F) (Local currency, %, x) Company Sales OP NP Share price ROE EPS EPSG P/E OP margin Net margin SM 166.4 68.9 58.8 43,550 42.0 3,566 211.3 12.2 41.4 35.3 Loen 164.8 30.8 20.6 13,600 22.4 813 6.3 16.7 18.7 12.5 Neowiz Internet 59.5 8.4 8.1 13,850 25.4 431 26.4 32.1 14.1 13.5 KT Music 44.5 1.9 1.9 2,440 - 65 312.0 37.5 4.2 4.4 Avex (JP) 124 13 6 928 -- 143 5.4 6.5 10.4 5.0 Realnetworks (US) 375 16 3 8.33 0.4 0.10 TTB 85.0 4.28 0.8 Domestic average 29.9 24.6 25.3 20.5 Overseas average 0.4 6.5 7.3 2.9 Global average 15.2 15.6 15.5 11.9 Note: SM is on a non-consolidated basis under K-IFRS and other Korean companies are on a parent-based under K-GAAP All units are in billions (Korea, Japan) and millions (the others) except for per share data Source: Thomson Reuters, KDB Daewoo Securities Research

Daewoo Securities Research 9 September 29, 2011 SM Entertainment

SM Entertainment (041510 KQ/Buy/TP: W57,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/10 12/11F 12/12F 12/13F (Wbn) 12/10 12/11F 12/12F 12/13F Revenues 86 92 166 184 Current Assets 72 83 147 218 Cost of Sales 49 55 80 84 Cash and Cash Equivalents 10 36 84 151 Gross Profit 38 37 87 100 AR & Other Receivables 7 7 13 15 SG&A Expenses 12 16 18 19 Inventories 2 2 4 5 Operating Profit (Adj) 26 21 69 81 Other Current Assets 10 11 20 22 Operating Profit 26 21 69 81 Non-Current Assets 43 63 77 80 Non-Operating Profit -3 -3 6 8 Investments in Associates 9 24 24 24 Net Financial Income -2 -2 -3 -5 Property, Plant and Equipment 3 4 3 2 Net Gain from Inv in Associates -4 0 0 0 Intangible Assets 4 6 5 4 Pretax Profit 23 18 74 88 Total Assets 115 146 224 298 Income Tax 1 -1 16 18 Current Liabilities 28 29 51 56 Profit from Continuing Operations 22 19 59 71 AP & Other Payables 15 16 29 32 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 3 3 3 3 Net Profit 22 19 59 71 Other Current Liabilities 10 10 19 21 Controlling Interests 22 19 59 71 Non-Current Liabilities 1 6 4 3 Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 0 0 0 0 Total Comprehensive Profit 22 19 59 70 Other Non-Current Liabilities 1 6 4 3 Controlling Interests 22 19 59 70 Total Liabilities 29 35 55 58 Non-Controlling Interests 0 0 0 0 Controlling Interests 86 111 169 240 EBITDA 28 25 72 83 Capital Stock 8 8 8 8 FCF (Free Cash Flow) 26 16 47 63 Capital Surplus 55 55 55 55 EBITDA Margin (%) 32.4 27.7 43.5 45.3 Retained Earnings 31 47 106 177 Operating Profit Margin (%) 29.5 22.8 41.4 43.8 Non-Controlling Interests 0 0 0 0 Net Profit Margin (%) 25.2 20.5 35.3 38.5 Stockholders' Equity 86 111 169 240

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/10 12/11F 12/12F 12/13F 12/10 12/11F 12/12F 12/13F Cash Flows from Op Activities 24 24 47 63 P/E (x) 12.6 38.0 12.2 10.2 Net Profit 22 19 59 71 P/CF (x) 11.3 30.8 11.5 9.8 Non-Cash Income and Expense 6 6 14 13 P/B (x) 3.3 6.9 4.4 3.1 Depreciation 1 1 1 1 EV/EBITDA (x) 8.1 26.1 8.5 6.6 Amortization 2 4 2 2 EPS (W) 1,342 1,145 3,566 4,288 Others 0 -5 3 3 CFPS (W) 1,498 1,415 3,773 4,453 Chg in Working Capital -4 -3 -10 -2 BPS (W) 5,066 6,341 9,926 14,209 Chg in AR & Other Receivables -1 4 -6 -1 DPS (W) 0 0 0 0 Chg in Inventories 1 0 -2 0 Payout ratio (%) 0.0 0.0 0.0 0.0 Chg in AP & Other Payables 4 3 13 3 Dividend Yield (%) 0.0 0.0 0.0 0.0 Income Tax Paid 0 1 -16 -18 Revenue Growth (%) 39.8 6.4 81.0 10.5 Cash Flows from Inv Activities -24 3 1 3 EBITDA Growth (%) 136.2 -9.3 184.5 15.2 Chg in PP&E -2 0 0 0 Operating Profit Growth (%) 174.9 -17.7 228.4 17.0 Chg in Intangible Assets -1 -1 -1 -1 EPS Growth (%) 382.6 -14.7 211.3 20.2 Chg in Financial Assets -15 14 0 0 Accounts Receivable Turnover (x) 14.8 16.0 20.0 16.3 Others -5 -9 3 5 Inventory Turnover (x) 40.7 41.6 52.0 42.4 Cash Flows from Fin Activities 2 1 0 0 Accounts Payable Turnover (x) 7.6 7.0 8.7 7.1 Chg in Financial Liabilities 0 0 0 0 ROA (%) 21.5 14.5 31.8 27.1 Chg in Equity 2 1 0 0 ROE (%) 29.1 19.2 42.0 34.6 Dividends Paid 0 0 0 0 ROIC (%) 148.8 88.5 213.5 212.0 Others 0 0 0 0 Liability to Equity Ratio (%) 33.1 31.8 32.5 24.3 Increase (Decrease) in Cash 2 27 48 67 Current Ratio (%) 261.5 283.2 290.8 391.1 Beginning Balance 8 10 36 84 Net Debt to Equity Ratio (%) Ending Balance 10 36 84 151 Interest Coverage Ratio (x) Source: Company data, KDB Daewoo Securities Research estimates

Daewoo Securities Research 10 September 29, 2011 SM Entertainment

Important Disclosures & Disclaimers 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. Analyst of the subject company or member of the analyst's household does not have any financial interest in the securities of the subject company and the nature of the financial interest (including without limitation, whether it consists of any option, right, warrant, future, long or short position). This report reflects the sole opinion of the analyst without any external influences by third parties.

Buy Relative performance of 20% or greater (W) S.M. Stock Trading Buy Relative performance of 10% or greater, but with volatility 60,000 50,000 Ratings Hold Relative performance of -10% and 10% 40,000 Sell Relative performance of -10% 30,000 Overweight Fundamentals are favorable or improving 20,000 Industry 10,000 Neutral Fundamentals are steady without any material changes Ratings 0 Underweight Fundamentals are unfavorable or worsening 9/09 3/10 9/10 3/11 9/11

* 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.

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Daewoo Securities Research 11