Pan Entertainment (068050 KQ) Poised to benefit from China’s growing content demand
Snapshot: Producer of Winter Sonata, the origin of the Korean Wave Founded in 1998, Pan Entertainment was mainly engaged in the business of managing Company Report recording artists and making soundtracks before producing its first drama series “Winter December 5, 2014 Sonata” in 2002. The drama became a huge hit in Japan, setting in motion the “Korean Wave” across the country. Since then, the company has established itself as a drama
producer, but has struggled to maintain stable profits due to the small size and buyer- Not Rated driven culture of the domestic market. Catalyst: China’s video content demand is surging, but options are limited Target Price (12M, W) - In China, there are over 4,000 television channels, all of which rely on advertising as their Share Price (12/03/14, W) 6,380 biggest source of income. Because advertising revenue is largely determined by primetime ratings, many broadcasters crave killer content, most preferably in the form Expected Return - of dramas and entertainment shows. But, while China’s video content demand has been rapidly increasing in terms of both quantity and quality, the country’s production
capabilities have lagged far behind. Demand has been growing not only among major OP (14F, Wbn) 1 broadcasters and studios, but also among internet portals like Alibaba, and online video Consensus OP (14F, Wbn) 0 streaming sites such as Youku Tudou and Sohu. To make up for the lack of content, EPS Growth (14F, %) - Chinese companies are increasingly turning to Korean pr oducers, as Korean content is 1) Market EPS Growth (14F, %) 1.1 hugely popular in China, 2) of higher quality, and 3) cheaper to produce. However, there P/E (14F, x) 82.9 are only a handful of prospective partners in Korea with a diverse roster of miniseries Market P/E (14F, x) 13.0 writers, proven filmography, and stable assets. KOSDAQ 545.02 Pan Entertainment recently signed an agreement with China’s top drama producer Market Cap (Wbn) 59 Zhejiang Huace, to co-produce a series of projects beginning with a new drama Shares Outstanding (mn) 9 titled ”Kill Me Heal Me” (written by Jin Suwan, the writer behind the hit series “The Free Float (%) 72.1 Moon Embracing the Sun”). We believe the co-projects will be more profitable than Foreign Ownership (%) 1.2 domestic projects, and expect the company to see more partnership opportunities going Beta (12M) 1.28 forward. 52-Week Low 2,335 52-Week High 8,160 Checklist: Taking the first step Pan Entertainment’s first co-project (Kill Me Heal Me) has suffered delays due to casting (%)(%)(%) 1M1M1M 6M6M6M 12M12M12M Absolute 36.2 29.4 165.8 problems. Casting is an important factor in determining the potential scope of co- Relative 38.0 26.1 147.9 productions. We believe any noise regarding casting will prove short-lived as long as the company’s partnership remains strong. 380 PAN ENTERTAINMENT KOSDAQ 330 280 230 180 130 80 11.13 3.14 7.14 11.14
Daewoo Securities CCo.,o., Ltd. FY (12) 12/09 12/10 12/11 12/12 12/13 12/14F Revenue (Wbn) 0 18 33 38 27 34 [Small Cap] OP (Wbn) 0 0 1 2 0 1
Daewoo Lee OP Margin (%) - 0.0 3.0 5.3 0.0 2.9 +822-768-4132 NP (Wbn) 0 0 0 0 -2 1 [email protected] EPS (W) 0 -52 49 16 -243 77 ROE (%) 0.0 -1.1 1.1 0.4 -5.5 1.7
P/E (x) - - 77.8 306.2 - 82.9 P/B (x) - 0.9 0.8 1.1 0.5 1.4 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates
Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including t he U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.
December 5, 2014 Pan Entertainment
Figure 111.1. TV ad rate by program genre
(W'000/15s) 10 9 8 7 6 5 4 3 2 1 - Children Sports Drama News Culture
Source: KBAC, KDB Daewoo Securities Research
Figure 222.2. PerPerPer-Per ---episodeepisode sale prices of KoreaKoreannnn dramas to Chinese online streaming sites
My Love from the Star 40
Three Days 50
Doctor Strange 80
It's Okay, That's love 120
Fated to Love You 120
My Lovely Girl 200
Pinocciho 280
0 50 100 150 200 250 300 (Wmn)
Source: Company data, KDB Daewoo Securities Research
Table 111.1. Comparision of Korean, Chinese and Japanese ddramarama productionproduction companies (Wbn) NameNameName Country MMMarketMarketarketarket cccapcapapap.... Revenue Net ppprofitprofitrofitrofit Alibama Pictures Hong Kong 4,856 106 29 Huayi Brothers Media China 4,632 329 121 Zhejiang Huace Film & TV China 3,531 249 58 Beijing HualuBaina Film & TV China 2,286 67 15 China Star Entertainment Hong Kong 316 178 20 IHQ Korea 156 69 -2 Media Asia Group Holdings Hong Kong 84 62 -21 Samhwa Networks Korea 83 33 -20 Chorokbaem Media Korea 63 29 -1 Pan entertainment Korea 60 29 0 Wellmade Yedang Korea 48 24 -1 SMI Culture Group Holdings Hong Kong 29 20 -39 Source: Bloomberg, KDB Daewoo Securities Research
KDB Daewoo Securities Research 2
December 5, 2014 Pan Entertainment
Pan Entertainment (068050 KQ/Not Rated)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/11 12/12 12/13 12/14F (Wbn) 12/11 12/12 12/13 12/14F Revenue 333333 383838 272727 343434 Current Assets 111111 212121 161616 202020 Cost of Sales 303030 333333 252525 303030 Cash and Cash Equivalents 1 8 1 2 Gross Profit 333 555 222 444 AR & Other Receivables 2 4 4 3 SG&A Expenses 222 333 333 222 Inventories 2 4 1 1 Operating Profit (Adj) 111 222 000 111 Other Current Assets 6 5 10 14 Operating Profit 111 222 000 111 NonNonNon-Non ---CurrentCurrent Assets 373737 464646 535353 484848 NonNonNon-Non ---OperatingOperating Profit ---1 -111 ---2-222 ---2-222 000 Investments in Associates 0 0 0 0 Net Financial Income 0 -1 -1 -1 Property, Plant and Equipment 31 43 43 42 Net Gain from Inv in Associates 0 0 -1 0 Intangible Assets 1 1 1 1 Pretax Profit 0 0 -2 1 Total Assets 484848 686868 686868 686868 Income Tax 0 0 0 0 Current Liabilities 888 151515 999 111111 Profit from Continuing Operations 0 0 -2 1 AP & Other Payables 2 2 2 2 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 5 12 7 9 Net Profit 0 0 -2 1 Other Current Liabilities 1 1 0 0 Controlling Interests 0 0 -2 1 NonNonNon-Non ---CurrentCurrent Liabilities 101010 131313 171717 151515 Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 8 10 14 15 Total Comprehensive Profit 000 000 ---2-222 111 Other Non-Current Liabilities 2 3 3 0 Controlling Interests 0 0 -2 1 Total Liabilities 171717 282828 262626 262626 Non-Controlling Interests 0 0 0 0 Controlling Interests 313131 404040 424242 434343 EBITDA 1 3 0 2 Capital Stock 3 4 5 5 FCF (Free Cash Flow) -9 -12 0 -3 Capital Surplus 11 16 20 20 EBITDA Margin (%) 3.0 7.9 0.0 5.9 Retained Earnings 12 12 10 11 Operating Profit Margin (%) 3.0 5.3 0.0 2.9 NonNonNon-Non ---ControllingControlling Interests 000 000 000 000 Net Profit Margin (%) 0.0 0.0 -7.4 2.9 Stockholders' Equity 313131 404040 424242 434343
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/11 12/12 12/13 12/14F 12/11 12/12 12/13 12/14F Cash Flows from Op Activities 0 1 0 -3 P/E (x) 77.8 306.2 - 82.9 Net Profit 0 0 -2 1 P/CF (x) 23.2 17.2 22.1 34.9 Non-Cash Income and Expense 1 2 3 1 P/B (x) 0.8 1.1 0.5 1.4 Depreciation 0 1 1 1 EV/EBITDA (x) 37.2 22.2 96.7 42.6 Amortization 0 0 0 0 EPS (W) 49 16 -243 77 Others 1 1 2 0 CFPS (W) 163 282 110 183 Chg in Working Capital -1 -1 0 -4 BPS (W) 5,003 4,545 4,519 4,597 Chg in AR & Other Receivables 1 -2 -1 1 DPS (W) 0 0 0 0 Chg in Inventories -1 -2 3 0 Payout ratio (%) 0.0 0.0 0.0 0.0 Chg in AP & Other Payables 1 1 0 1 Dividend Yield (%) 0.0 0.0 0.0 0.0 Income Tax Paid 000 000 000 000 Revenue Growth (%) 83.3 15.2 -28.9 25.9 Cash Flows from Inv Activities -6 -10 -10 0 EBITDA Growth (%) - 200.0 - - Chg in PP&E -8 -12 0 0 Operating Profit Growth (%) - 100.0 - - Chg in Intangible Assets 0 0 0 0 EPS Growth (%) - -67.3 - - Chg in Financial Assets 1 1 -8 0 Accounts Receivable Turnover (x) 18.1 16.0 7.2 10.0 Others 111 111 ---2-222 000 Inventory Turnover (x) 21.1 13.0 12.0 39.4 Cash Flows from Fin Activities 7 17 3 3 Accounts Payable Turnover (x) 33.1 37.9 58.2 43.5 Chg in Financial Liabilities - - - - ROA (%) 0.6 0.2 -3.4 1.0 Chg in Equity 1 6 5 0 ROE (%) 1.1 0.4 -5.5 1.7 Dividends Paid 0 0 0 0 ROIC (%) 2.0 4.2 -0.3 1.3 Others ------Liability to Equity Ratio (%) 56.5 71.1 63.3 60.2 Increase (Decrease) in Cash 0 6 -6 0 Current Ratio (%) 144.7 140.5 167.3 184.7 Beginning Balance 1 1 8 1 Net Debt to Equity Ratio (%) 37.4 35.4 42.1 38.8 Ending Balance 111 888 111 222 Interest Coverage Ratio (x) 3.2 2.1 -0.2 1.1 Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 3
December 5, 2014 Pan Entertainment
APPENDIX 1
Important Disclosures & Disclaimers Disclosures As of the publication date, Daewoo Securities Co., Ltd and/or its affiliates do not have any special interest with the subjec t company and do not own 1% or more of the subject company's shares outstanding.
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. Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. This report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws and regulations or subject Daewoo and its affiliates to registration or licensing requirements in any jurisdiction should receive or make any use hereof. Information and opinions contained herein are subject to change without notice and no part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Daewoo. Daewoo, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making or other financial services as are permitted under applicable laws and regulations. The price and value of the investments referred to in this report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur.
Distribution United Kingdom: This report is being distributed by Daewoo Securities (Europe) Ltd. in the United Kingdom only to (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”), and (ii) high net worth companies and other persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as “Relevant Persons”). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its contents. United States: This report is distributed in the U.S. by Daewoo Securities (America) Inc., a member of FINRA/SIPC, and is only intended for major institutional investors as defined in Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of 1934. All U.S. persons that receive this document by their acceptance thereof represent and warrant that they are a major institutional investor and have not received this report under any express or implied understanding that they will direct commission income to Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed herein should contact and place orders with Daewoo Securities (America) Inc., which accepts responsibility for the contents of this report in the U.S. The securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or sold in the U.S. or to U.S. persons absent registration or an applicable exemption from the registration requirements. Hong Kong: This document has been approved for distribution in Hong Kong by Daewoo Securities (Hong Kong) Ltd., which is regulated by the Hong Kong Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person. All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Daewoo or its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Daewoo and its affiliates to any registration or licensing requirement within such jurisdiction.
KDB Daewoo Securities Research 4
December 5, 2014 Pan Entertainment
KDB Daewoo Securities International Network
DaDaDaewooDa ewoo Securities Co. Ltd. (Seoul) Daewoo Securities (Hong Kong) Ltd. Daewoo Securities (America) Inc. Head Office Two International Finance Centre 320 Park Avenue 34-3 Yeouido-dong, Yeongdeungpo-gu Suites 2005-2012 31st Floor
Seoul 150-716 8 Finance Street, Central New York, NY 10022 Korea Hong Kong, China United States Tel: 82-2-768-3026 Tel: 85-2-2845-6332 Tel: 1-212-407-1000 Daewoo Securities (Europe) Ltd. Daewoo Securities (Singapore) Pte. Ltd. Tokyo Branch 41st Floor, Tower 42 Six Battery Road #11-01 7th Floor, Yusen Building 25 Old Broad St. Singapore, 049909 2-3-2 Marunouchi, Chiyoda-ku London EC2N 1HQ Tokyo 100-0005 United Kingdom Japan Tel: 44-20-7982-8000 Tel: 65-6671-9845 Tel: 81-3- 3211-5511
Beijing Representative Office Shanghai Representative Office Ho Chi Minh Representative Office 2401A, 24th Floor, East Tower, Twin Towers Room 38T31, 38F SWFC Suite 2103, Saigon Trade Center B-12 Jianguomenwai Avenue 100 Century Avenue 37 Ton Duc Thang St,
Chaoyang District, Beijing 100022 Pudong New Area, Shanghai 200120 Dist. 1, Ho Chi Minh City, China China Vietnam Tel: 86-10-6567-9299 Tel: 86-21-5013-6392 Tel: 84-8-3910-6000 Daewoo Investment Advisory (Beijing) Co., Ltd. Daewoo Securities (Mongolia) LLC PT. Daewoo Securities Indonesia 2401B, 24th Floor, East Tower, Twin Towers #406, Blue Sky Tower, Peace Avenue 17 Equity Tower Building Lt.50 B-12 Jianguomenwai Avenue, 1 Khoroo, Sukhbaatar District Sudirman Central Business District Jl.
Chaoyang District, Beijing 100022 Ulaanbaatar 14240 Jendral Sudirman Kav. 52-53, Jakarta Selatan China Mongolia Indonesia 12190 Tel: 86-10-6567-9699 Tel: 976-7011-0807 Tel: 62-21-515-1140
KDB Daewoo Securities Research 5