January 4, 2012 Company Report

SM Entertainment (041510 KQ) Entertainment

Daewoo Securities Co., Ltd. Japanese concert ticket sales to reach 500,000 in 1H12 Chang-kwean Kim +822-768-4321 Raise TP to W70,000; Maintain Buy call [email protected]

We maintain our Buy call on SM Entertainment and raise our target price to W70,000 Jee-hyun Moon (from W57,000). As the companyÊs 4Q11 results are forecast to exceed our previous +822-768-3615 projections, we adjusted up our 2011 and 2012 EPS estimates by 4.6% and 3.3%, [email protected] respectively. Also, we are in the process of getting a clearer picture of the companyÊs 2012 earnings variables (e.g., concert schedules are being firmed up). We arrived at our target price by applying a P/E of 19.12x (a 20% discount to the domestic music industryÊs average 2012F P/E of 23.9x) to our 2012F EPS.

Japanese concert ticket sales likely to double YoY in 2012 to 1.2mn tickets

We estimate that SM EntertainmentÊs artists drew 588,000 fans to Japanese Buy (Maintain) concerts in 2011 (based on maximum capacity figures), vs. 374,000 fans in 2009 and Target Price (12M, W) 70,000 13,000 fans in 2010. The company is believed to have sold 2.53mn CDs in 2011 in Share Price (01/03/12, W) 47,500 , vs. 1.16mn copies in 2009 and 1.76mn copies in 2010. We assume that Expected Return (%) 47.4 100,000 concert ticket sales lead to W6~7bn in royalty income, while 100,000 CD EPS Growth (11F, %) -10.8 sales result in W700~800mn in royalty income. Market EPS Growth (11F, %) -0.1 P/E (11F, x) 39.7 In 2012, SMÊs artists are forecast to lure more than 1.2mn fans to their Japanese Market P/E (11F, x) 10.4 concerts. TVXQ and are scheduled to hold concerts (capacity of 479,000 KOSDAQ 513.83 fans) in Japan in 1H. And GirlsÊ Generation is slated to focus on its Japanese activities Market Cap (Wbn) 787 this year. Furthermore, another girl group, f(x), plans to make its Japanese debut in Shares Outstanding (mn) 17 2012. Japanese concert ticket sales are likely to reach 500,000 in 1H12 alone. Avg Trading Volume (60D, '000) 876 Avg Trading Value (60D, Wbn) 44 Earnings momentum to stay strong through 1Q12 Dividend Yield (11F, %) 0.0 Free Float (%) 75.6 In 4Q11, SM is forecast to post revenues of W31.6bn (up 74.1% YoY) and an 52-Week Low (W) 15,650 operating profit of W11.3bn (up 394.0% YoY). The companyÊs 4Q results should 52-Week High (W) 62,000 reflect sales of GirlsÊ GenerationÊs first regular Japanese album (released in June) and Beta (12M, Daily Rate of Return) 0.7 its global album The Boys (released in 4Q). Price Return Volatility (12M Daily, %, SD) 4.1 Foreign Ownership (%) 8.0 Royalty income from Japanese concerts, including the September SM Town concert Major Shareholder(s) at the Dome, is forecast to be recognized starting in 1Q12. The companyÊs SM Lee et al. (24.39%) 2012 revenues and operating profit are projected to climb to W166.9bn and Partners Venture Capital et al. (7.24%) W70.3bn, respectively. In projecting the companyÊs 2012 earnings, we conservatively NPS (6.24%) assumed that the companyÊs Japanese CD sales would reach 2.51mn copies in 2012 Price Performance (the 2011 level). Royalty income from Japan is recognized two to three quarters after (%) 1M 6M 12M sales are generated. Absolute 5.1 101.7 165.4 Relative 7.2 113.5 174.8

§ Earnings & Valuation Metrics Share price 440 KOSDAQ FY Revenues OP OP Margin NP EPS EBITDAFCF ROE P/E P/B EV/EBITDA 390 (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (x) (x) (x) 340 12/09 62 9 15.0 5 278 12 10 7.3 16.2 1.2 3.5 290 240 12/10 86 26 29.5 22 1,342 28 26 29.1 12.6 3.3 8.1 190 12/11F 102 23 22.6 20 1,197 28 15 20.0 38.2 7.1 24.8 140 12/12F 167 70 42.1 61 3,683 74 49 42.8 12.9 4.7 9.1 90 12/13F 186 83 44.7 74 4,462 86 65 35.3 10.7 3.3 7.0 40 12/10 4/11 8/11 12/11 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

Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. January 4, 2012 SM Entertainment

Table 1. Annual earnings forecasts (Wbn, %) 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F Revenues 21 29 31 40 62 86 102 167 186 CD 8 9 9 11 15 15 16 17 18 Digital music 2 4 4 5 10 9 9 10 15 Overseas 6 5 6 9 16 37 41 107 118 CD 0 0 1 1 1 1 2 3 3 Royalty 6 5 5 8 15 36 44 105 115 Management 5 12 12 16 22 26 37 33 35 Revenue breakdown CD 36.2 29.9 28.4 26.9 23.7 17.3 15.6 10.1 9.5 Digital music 9.0 13.7 14.0 11.9 15.3 9.8 8.6 5.9 8.1 Overseas 28.8 16.5 18.0 21.4 25.5 42.6 40.0 64.2 63.7 Management 26.0 39.9 39.6 39.8 35.5 30.3 35.8 19.8 18.7 Albums sold (Â000) 101 118 120 128 174 178 190 200 210 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 55.4 59.0 85.4 Management/CD sales 71.8 133.5 139.7 148.0 149.7 175.4 197.7 196.6 197.1 COGS 16 25 29 36 42 49 62 77 81 Gross profit 7 5 4 8 20 38 41 90 104 Gross profit margin 29.4 15.1 12.5 17.5 32.3 43.6 39.8 54.0 56.2 Operating profit 1 -2 -4 -2 9 26 23 70 83 OP margin 5.6 -7.7 -11.2 -3.9 15.0 26.2 22.6 42.1 44.7 Pretax profit 1 -3 -7 5 6 23 26 77 92 Pretax margin 5.2 -9.6 -21.4 10.4 9.9 26.2 25.1 46.0 49.5 Net profit 1 -4 -8 4 5 22 20 61 74 Net margin 5.4 -13.5 -23.0 9.8 7.2 25.2 19.3 36.4 39.6 YoY growth Revenues 41.6 7.1 27.9 54.1 39.9 18.3 63.3 11.2 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 3.9 12.2 51.8 Overseas -19.0 17.0 52.0 84.1 133.1 11.1 162.4 10.2 Management 117.5 6.3 28.4 37.3 19.6 39.6 -9.7 5.3 Operating profit TTR RR RR TTB 174.9 -9.5 205.0 18.1 Net profit TTR RR TTB 4.5 387.7 -9.5 207.8 21.1 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 Revenues 92 166 102 167 11.2 0.3 Operating profit 21 69 23 70 9.8 2.1 Net profit 19 59 20 61 4.4 3.3 EPS 1,145 3,566 1,197 3,683 4.6 3.3 OP margin 22.8 41.4 22.6 42.1 Net margin 20.5 35.3 19.3 36.4 Note: On a non-consolidated basis under K-IFRS Source: KDB Daewoo Securities Research

KDB Daewoo Securities Research 2 January 4, 2012 SM Entertainment

Table 3. Overseas sales assumptions (%, Wbn, Â000 copies) 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F Market share in Japan 0.4 0.3 0.4 0.5 1.1 3.3 3.5 8.7 9.8 Royalties from Japan 4 3 4 5 10 28 36 96 106 Revnues from Japan 18 15 17 26 49 142 144 322 355 Revenues from other 2 2 2 3 6 9 10 11 12 countries # of CDs sold in Japan TVXQ (5) 300 940 - - - GirlsÊ Generation - - 700 940 940 SHINee - - - 310 470 Super Junior - - - 310 470 TVXQ (2) - - 300 940 940 Total 300 940 1,000 2,510 2,820 Source: KDB Daewoo Securities Research

Table 4. Annual trends of CD and concert ticket sales in Japan (copies, seats) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012F CD 177,140 1,692,267 1,534,170 901,971 1,408,932 885,182 913,728 914,085 1,161,662 1,769,738 2,533,699 - Concert - - 37,424 171,000 106,000 41,400 159,520 337,039 374,126 13,000 588,441 479,000 Note: Concert sales are based on the maximum seating capacity of the venues; 2012F Concert sales reflect the performances until July 1st; Above figures are unofficial; Source: KDB Daewoo Securities Research

Figure 1. Annual trend of CD sales in Japan Figure 2. Annual trend of concert tickets sales in Japan

('000) ('000) 750 3,000 # of CDs sold # of concert seats

2,400 600

1,800 450

1,200 300

600 150

0 0 01 03 05 07 09 11 01 03 05 07 09 11

Figure 3. Quarterly trends of CD and concert ticket sales in Japan Figure 4. Annual trends of CD and concert ticket sales in Japan

('000) ('000) 3,500 # of concert seats 3,500 # of concert seats # of CDs sold # of CDs sold 2,800 2,800

2,100 2,100

1,400 1,400

700 700

0 0 01 03 05 07 09 11 01 03 05 07 09 11

Note: Concert scales are based on the maximum seating capacity of the venues; 2012F Concert sales reflect the performances until July 1st; Above figures are unofficial; Source: KDB Daewoo Securities Research

KDB Daewoo Securities Research 3 January 4, 2012 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 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

KDB Daewoo Securities Research 4 January 4, 2012 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-MIROTIC- 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 Stand by U 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: BEST SELECTION 2010 3/24/10 228,448 時ヲ止メテ 7/21/10 12,459 WOO WEEKEND 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 1/26/11 285,051 Single: Why? 4/27/11 169,798 Single3: Mr.taxi, RDR 6/1/11 850,000 ALBUM1: Girls' Generation 6/8/11 100,000 Single1: Bonamana 6/22/11 112,603 Single1: Replay 7/20/11 182,012 Superstar 8/23/11 N/A DVD: The 1st ASIA TOUR 'Into The New World' 8/24/11 N/A Mini album: Super Junior-M, Perfection 8/29/11 69,620 Single: Juliet 9/28/11 282,552 ALBUM: TONE 10/12/11 52,334 Single: Lucifer 10/19/11 N/A Digital Single: Mr. Simple (iTunes) 10/21/11 69,687 ALBUM: The Boys (Imported from Korea and sold in Japan) 11/16/11 N/A DVD: Super Show3 in Japan 11/30/11 146,623 Single: Winter 12/7/11 98,018 Single: Mr. Simple 12/7/11 81,868 ALBUM: the First 12/7/11 N/A DVD Single: Milestone (the 10th anniversary) 12/14/11 N/A DVD: JAPAN FIRST TOUR 12/15/11 3,447 ALBUM: 2011 SM Town 12/23/11 N/A DVD: The 3rd Asia Tour - Super Show3 12/28/11 30,086 ALBUM1: Girls' Generation (Repackage) 1/11/12 TBC DVD: 1st Concert "SHINee World" 2/22/12 DVD: SM Town Live in Tokyo 2012 * f(x) to make debut in Japan 2012 TBC * BoA to release album during the summer in Japan 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

KDB Daewoo Securities Research 5 January 4, 2012 SM Entertainment

Table 6. Concerts of SMÊs major artists in Japan and overseas (seats) Date BoA TVXQ GirlsÊ Generation SHINee Super Junior Joint concert City 3/27/03 2,700 Osaka 3/28/03 2,700 Osaka 3/30/03 3,012 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 Yokohama 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

KDB Daewoo Securities Research 6 January 4, 2012 SM Entertainment

Date BoA TVXQ GirlsÊ Generation SHINee Super Junior Joint concert City 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

KDB Daewoo Securities Research 7 January 4, 2012 SM Entertainment

Date BoA TVXQ GirlsÊ Generation SHINee Super Junior Joint concert City 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 6/17/11 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 10/27/11 10,000 Nagoya 11/24/11 16,000 Osaka 11/25/11 16,000 Osaka 12/10/11 5,000 40,000 Osaka 12/11/11 5,000 40,000 Osaka 12/24/11 15,000 Tokyo

KDB Daewoo Securities Research 8 January 4, 2012 SM Entertainment

Date BoA TVXQ GirlsÊ Generation SHINee Super Junior Joint concert City 1/18/12 17,000 Yokohama 1/19/12 17,000 Yokohama 1/25/12 10,000 Nagoya 1/26/12 10,000 Nagoya 1/27/12 10,000 Nagoya 2/11/12 15,000 Fukuoka 2/12/12 15,000 Fukuoka 2/18/12 10,000 Niigata 2/19/12 10,000 Niigata 2/23/12 10,000 Sapporo 2/24/12 10,000 Sapporo 3/3/12 10,000 Hiroshima 3/4/12 10,000 Hiroshima 3/9/12 8,000 Fukui 3/10/12 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 3/20/12 37,000 Saitama 4/25/12 11,000 Fukuoka 4/29/12 11,000 Hokkaido 5/3/12 10,000 Nagoya 5/4/12 10,000 Nagoya 5/8/12 16,000 Osaka 5/9/12 16,000 Osaka 5/12/12 10,000 Hyogo 5/13/12 10,000 Hyogo 5/30/12 13,000 Tokyo 5/31/12 13,000 Tokyo 6/2/12 13,000 Tokyo 6/3/12 13,000 Tokyo 6/30/12 10,000 Hiroshima 7/1/12 10,000 Hiroshima Note: Unofficial figures; Concert scales are based on maximum seating capacity of the venues; 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

KDB Daewoo Securities Research 9 January 4, 2012 SM Entertainment

Table 7. Earnings forecasts and valuations of global major music companies (2011F) (local currency, %, x) Company Sales OP NP Share price ROE EPS EPSG P/E OP margin NP margin SM 102.2 23.1 19.7 47,500 20.0 1,197 -10.8 39.7 22.6 19.3 YG 75.1 17.3 12.3 74,600 37.7 2,544 42.6 29.3 23.0 16.4 Loen 152.9 27.9 19.4 14,000 25.0 765 98.1 18.3 18.2 12.7 Neowiz Internet 53.1 7.1 6.4 14,250 15.8 341 -49.8 41.8 13.3 12.0 KT Music 42.7 0.8 0.5 2,425 -- 16 -21.7 153.6 1.8 1.1 Avex (JP) 119 12 6 986 16.1 134 8.3 7.4 10.0 4.9 Amuse (JP) 28 2 1 979 10.9 146 18.9 6.7 8.3 4.8 Realnetworks (US) 336 -14 -28 7.50 -- -0.81 TTR ------Pandora (US) 275 -5 -3 10.01 1.0 -0.02 RR ------Korean average 24.6 32.3 17.9 13.7 Overseas average 13.5 7.0 9.2 4.9 Global average 19.0 19.6 13.9 10.2 Note: SM is on a non-consolidated basis under K-IFRS and YG is on a consolidated basis under K-IFRS; Other Korean companies are on a parent basis under K-GAAP; All units are in billions (Korea, Japan) and millions (others) except for per share data Source: Thomson Reuters, KDB Daewoo Securities Research

Table 8. Earnings forecasts and valuations of global major music companies (2012F) (local currency, %, x) Company Sales OP NP Share price ROE EPS EPSG P/E OP margin NP margin SM 166.9 70.3 60.7 47,500 42.8 3,683 207.7 12.9 42.1 36.4 YG 102.0 25.9 19.3 74,600 38.0 3,872 52.2 19.3 25.4 19.0 Loen 164.8 30.8 20.6 14,000 22.4 813 6.3 17.2 18.7 12.5 Neowiz Internet 59.5 8.4 8.1 14,250 25.4 431 26.4 33.0 14.1 13.5 KT Music 44.5 1.9 1.9 2,425 - 65 312.0 37.3 4.2 4.4 Avex (JP) 123 12 6 986 -- 142 5.8 7.0 10.1 5.0 Amuse (JP) 29 2 1 979 -- 152 3.7 6.5 8.3 4.8 Realnetworks (US) 328 15 -14 7.50 -- -0.42 RR -- 4.6 -- Pandora (US) 417 -6 -1 10.01 3.7 -0.01 RR ------Korean average 32.1 23.9 25.5 20.6 Overseas average -- 6.7 7.7 4.9 Global average 32.1 15.3 15.9 13.7 Note: SM is on a non-consolidated basis under K-IFRS and YG is on a consolidated basis under K-IFRS; Other Korean companies are on a parent basis under K-GAAP; All units are in billions (Korea, Japan) and millions (others) except for per share data Source: Thomson Reuters, KDB Daewoo Securities Research

KDB Daewoo Securities Research 10 January 4, 2012 SM Entertainment

SM Entertainment (041510 KQ/Buy/TP: W70,000)

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 86 102 167 186 Current Assets 72 97 162 235 Cost of Sales 49 62 77 81 Cash and Cash Equivalents 10 51 102 171 Gross Profit 38 41 90 104 AR & Other Receivables 7 8 14 15 SG&A Expenses 12 18 20 21 Inventories 2 3 4 5 Operating Profit (Adj) 26 23 70 83 Other Current Assets 10 12 20 22 Operating Profit 26 23 70 83 Non-Current Assets 43 50 65 71 Non-Operating Profit -3 3 7 9 Investments in Associates 9 3 3 3 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 5 4 4 Pretax Profit 23 26 77 92 Total Assets 115 147 227 306 Income Tax 1 6 16 18 Current Liabilities 28 34 53 58 Profit from Continuing Operations 22 20 61 74 AP & Other Payables 15 18 29 33 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 3 5 5 5 Net Profit 22 20 61 74 Other Current Liabilities 10 11 19 21 Controlling Interests 22 20 61 74 Non-Current Liabilities 1 1 2 3 Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 0 0 0 0 Total Comprehensive Profit 22 19 60 73 Other Non-Current Liabilities 1 1 2 3 Controlling Interests 22 19 60 73 Total Liabilities 29 36 55 61 Non-Controlling Interests 0 0 0 0 Controlling Interests 86 112 172 245 EBITDA 28 28 74 86 Capital Stock 8 8 8 8 FCF (Free Cash Flow) 26 15 49 65 Capital Surplus 55 55 55 55 EBITDA Margin (%) 32.4 27.1 44.2 46.2 Retained Earnings 31 48 109 182 Operating Profit Margin (%) 29.5 22.6 42.1 44.7 Non-Controlling Interests 0 0 0 0 Net Profit Margin (%) 25.2 19.3 36.4 39.6 Stockholders' Equity 86 112 172 245

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 17 49 65 P/E (x) 12.6 38.2 12.9 10.7 Net Profit 22 20 61 74 P/CF (x) 11.3 30.9 12.2 10.3 Non-Cash Income and Expense 6 8 13 12 P/B (x) 3.3 7.1 4.7 3.3 Depreciation 1 1 1 1 EV/EBITDA (x) 8.1 24.8 9.1 7.0 Amortization 2 4 2 2 EPS (W) 1,342 1,197 3,683 4,462 Others 0 1 3 4 CFPS (W) 1,498 1,479 3,890 4,628 Chg in Working Capital -4 -4 -9 -3 BPS (W) 5,066 6,429 10,116 14,561 Chg in AR & Other Receivables -1 -2 -5 -2 DPS (W) 0 0 0 0 Chg in Inventories 1 0 -2 -1 Payout ratio (%) 0.0 0.0 0.0 0.0 Chg in AP & Other Payables 4 6 11 3 Dividend Yield (%) 0.0 0.0 0.0 0.0 Income Tax Paid 0 -6 -16 -18 Revenue Growth (%) 39.8 18.3 63.3 11.2 Cash Flows from Inv Activities -24 22 2 4 EBITDA Growth (%) 136.2 -1.0 166.0 16.4 Chg in PP&E -2 -1 0 0 Operating Profit Growth (%) 174.9 -9.5 205.0 18.1 Chg in Intangible Assets -1 -1 -1 -1 EPS Growth (%) 382.6 -10.8 207.7 21.2 Chg in Financial Assets -15 13 0 0 Accounts Receivable Turnover (x) 14.8 16.8 19.2 16.3 Others -5 11 3 5 Inventory Turnover (x) 40.7 43.7 50.0 42.5 Cash Flows from Fin Activities 2 3 0 0 Accounts Payable Turnover (x) 7.6 7.3 8.4 7.1 Chg in Financial Liabilities 0 2 0 0 ROA (%) 21.5 15.1 32.5 27.6 Chg in Equity 2 1 0 0 ROE (%) 29.1 20.0 42.8 35.3 Dividends Paid 0 0 0 0 ROIC (%) 148.8 92.6 207.0 212.0 Others 0 0 0 0 Liability to Equity Ratio (%) 33.1 31.9 32.0 24.8 Increase (Decrease) in Cash 2 42 50 69 Current Ratio (%) 261.5 284.1 306.7 403.7 Beginning Balance 8 10 51 102 Net Debt to Equity Ratio (%) Ending Balance 10 51 102 171 Interest Coverage Ratio (x) Source: Company data, KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research 11 January 4, 2012 SM Entertainment

Important Disclosures & Disclaimers Disclosures As of the publication date, Daewoo Securities Co., Ltd and/or its affiliates do not have any special interest with the subject company and do not own 1% or more of the subject company's shares outstanding.

Buy Relative performance of 20% or greater (W) S.M. Stock Trading Buy Relative performance of 10% or greater, but with volatility 80,000 Ratings Hold Relative performance of -10% and 10% 60,000

Sell Relative performance of -10% 40,000

Overweight Fundamentals are favorable or improving 20,000 Industry Neutral Fundamentals are steady without any material changes Ratings 0 1/10 7/10 12/10 6/11 12/11 Underweight Fundamentals are unfavorable or worsening * Ratings and Target Price History (Share price (----), Target price (----), Not covered (■), Buy (▲), Trading Buy (■), Hold (●), Sell (◆)) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Daewoo Securities, we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analystÊs estimate of future earnings. The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions.

Analyst Certification The research analysts who prepared this report (the „Analysts‰) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. Daewoo Securities Co., Ltd. policy prohibits its Analysts and members of their households from owning securities of any company in the AnalystÊs area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of Daewoo Securities, the Analysts receive compensation that is impacted by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Daewoo Securities Co., Ltd. except as otherwise stated herein.

Disclaimers This report is published by Daewoo Securities Co., Ltd. („Daewoo‰), a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith, but such information has not been independently verified and Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Korean language. If this report is an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. This report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws and regulations or subject Daewoo and its affiliates to registration or licensing requirements in any jurisdiction should receive or make any use hereof. Information and opinions contained herein are subject to change without notice and no part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Daewoo. Daewoo, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making or other financial services as are permitted under applicable laws and regulations. The price and value of the investments referred to in this report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur.

KDB Daewoo Securities Research 12 January 4, 2012 SM Entertainment

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 International Network

Daewoo Securities Co. Ltd. () Daewoo Securities (Hong Kong) Ltd. Daewoo Securities (America) Inc. Head Office Two International Finance Centre 600 Lexington Avenue 31-3 Yeouido-dong, Yeongdeungpo-gu Suites 2005-2012 Suite 301 Seoul 150-716 8 Finance Street, Central New York, NY 10022 Korea Hong Kong United States Tel: 82-2-768-3026 Tel: 85-2-2514-1304 Tel: 1-212-407-1022

Daewoo Securities (Europe) Ltd. Tokyo Representative Office Beijing Representative Office Tower 42, Level 41 7th Floor, Yusen Building Suite 2602, Twin Towers (East) 25 Old Broad Street 2-3-2 Marunouchi, Chiyoda-ku B-12 Jianguomenwai Avenue London EC2N 1HQ Tokyo 100-0005 Chaoyang District, Beijing 100022 United Kingdom Japan China Tel: 44-20-7982-8016 Tel: 81-3- 3211-5511 Tel: 86-10-6567-9699

Shanghai Representative Office Ho Chi Minh Representative Office Unit 13, 28th Floor, Hang Seng Bank Tower Centec Tower 1000 Lujiazui Ring Road 72-74 Nguyen Thi Minh Khai Street Pudong New Area, Shanghai 200120 Ward 6, District 3, Ho Chi Minh City China Vietnam Tel: 86-21-5013-6392 Tel: 84-8-3910-6000

KDB Daewoo Securities Research 13