June 4, 2012 Pan Entertainment (068050KQ) Mid-Cap Research The production company that embraces the sun Analyst. : Jina Kim [email protected] 82-2-2009-7082 Leading Traffic Light: Green Pan Entertainment is… Green light because: A leading drama producer that produced ‘The A strong drama production ability proven by Moon that Embraces the Sun’, ‘The Man from many hit drama series the Equator’, and ‘Winter Sonata’ Drama production + OST + Asset value Having the most writers (20) in the industry Growth Potential: Expected revenue growth of 77.8% yoy in 2012 BUY through airing 7~8 serial dramas Target Price (KRW) W10,000 Additional revenue of W1bn~W3.6bn through Current Price (KRW) W5,940 rental income Upside Potential (%) 68.4% Management and shareholder value: Key Data June 1, 2012 CEO has over 24 years of experience in the Sector Media drama production KOSDAQ 472.1 Divisional CEOs → systematic management, Market Cap. (Wbn) 39.2 strong responsibility Shares Outstanding (m) 6.6 Value creation: Foreign Ownership (%) 0.4 Steady increase in ROE is expected from 2012 52 Week High (KRW) 7,000 ROE to improve to 14.5% in 2012, 18.5% in 2013 Low (KRW) 2,380 from 0.9% in 2011 60-d avg. turnover (Wbn) 2.2 Major Shareholders (%) Valuation: Yung Suk Park & Others 28.4 Target price of W10,000 rendered by applying domestic peer group PER of 13.9x Performance (%) 1M 6M 12M 68.4% upside potential from the current price of Absolute 12.0 94.9 98.2 W5,940 Relative 16.3 98.5 101.8 Relative Performance CAVEAT EMPTOR!!! – Watch out for… (pt) PAN ENTERTAINMENT KOSDAQ 200 While the company proved its strong production ability through 150 many hit dramas, a risk of failure still exists per program due to the nature of the entertainment industry. 100 50 Jun-11 Sep-11 Dec-11 Mar-12 Valuation Forecast FY Sales % chg OP OPM NP EPS EPS PER EV/EBITDA ROE P/B (Wbn) yoy (Wbn) (%) (Wbn) (W) Growth (%) (x) (x) (%) (x) 2009 15.9 (12.4) 1.7 10.5 0.4 93 N/A 64.9 10.9 2.0 1.2 2010 18.0 13.6 0.3 1.7 0.1 16 (83.1) 383.4 45.9 0.3 0.9 2011 32.7 81.3 0.7 2.2 0.3 43 171.7 141.1 52.8 0.9 1.1 2012E 58.1 77.8 6.4 11.0 4.8 725 1,589.3 8.2 5.8 14.5 1.1 2013F 67.6 16.3 8.7 12.8 6.7 1,013 39.6 5.9 4.4 17.2 0.9 2014F 79.5 17.5 10.9 13.7 8.7 1,313 29.6 4.5 3.4 18.7 0.8 4 June 2012 Table of contents Key check points…..………………...………………...…..………….…… 3 Section 1: Valuation – Target price....………………………………..…. 4 Section 2: What is the management philosophy? ……..……………. 5 Section 3: Company snapshot & operations..…………………………. 6 Section 4: Facts & Figures………………………………………………… 10 2 4 June 2012 Key Check Point ‘The Moon that Embraces the Sun’ + ‘Man from the Equator’ = 62% ratings Pan Entertainment recently produced megahit television serial dramas such as ‘The Moon that Embraces the Sun’ and ‘The Man from the Equator’. ‘The Moon that Embraces the Sun’ recorded 42.3% of ratings which is the highest ratings since ‘King of Baking, Kim Tak Gu’ (50.8%) in 2010. ‘Bridal Mask’ has begun broadcasting on KBS since May 30th and is running amidst rising popularity, recording the highest rating (12.7%) among dramas airing at the same time. ‘Bridal Mask’ is based on a popular comic book written by Young Man Huh, and therefore, received a great attention in the market even before airing. Pan Entertainment generated revenue of W28.5bn through productions of four drama series in 2011 and is expected to record revenue of W46.9bn by producing seven or eight drama series in 2012. We believe that the revenue will grow 64.9% yoy in 2012 thanks to the popularity of ‘The Moon that Embraces the Sun’ and ‘Man from the Equator’. The company already generated more than W10bn through ‘The Moon that Embraces the Sun’. Pan Entertainment is regarded as one of the best production companies in the market with production experience of 15 years. The company’s success comes from creative writers with gripping stories as well as the outstanding planning ability. Pan Entertainment has around 20 writers, one of the largest numbers in the industry. As a scenario is the primary requirement for success in dramas, Pan Entertainment has adequate competitiveness in the industry with creative writers. Pan Entertainment is expected to record annual 16%~17% revenue growth in 2013 and 2014 driven by its experience and manpower. A beneficiary of the positive changes in the drama production outsourcing environment Three national television networks, MBC, KBS, and SBS together lead the drama production industry, and control the production and the distribution. The government imposes to list outsourcing programs on the three networks since 1991 in order to improve production and distribution structures. Currently, outsourcing portion is over 40% on the recommendation of Korean Broadcasting Commission. The actual portion of outsourcing is considered to be over 70% thanks to the improvement in outsourcing production competitiveness. Also, the demand for outsourcing production is increasing with the development of new markets such as general programming channels. Since broadcasting stations have provided only 60%~70% of production costs, leaving the production companies in a chronic deficit, each production company should put PPL (Product Placement) advertisement in a drama in order to fill in the rest of costs. However, broadcasting stations currently provide over 80% of production costs showing a gradual improvement in the drama production environment. Moreover, exporting amount of contents has been increasing with the Korean wave sweeping across the world, and the number of countries that imports the contents are expanding throughout the Central & South America from East Asia. Solid balance sheet + additional profit through office lease Pan Entertainment has a stable profit source in addition to drama productions. Since the profitability of the drama productions depends on the TV viewer rankings, drama productions are vulnerable to the profit fluctuations. In this circumstance, Pan Entertainment has secured stable and high profit gain through office rental income from its recently built office, Global Media Contents Center (GMCC). In 2012, Pan Entertainment is expected to record W1bn from the rental income and W3.6bn is forecasted starting from 2013. Target price of W10,000 - 68.4% upside potential Pan Entertainment is the Korea leading drama series producer. The first drama ‘Winter Sonata’ was the Pan Entertainment’s representative drama which has proved its massive ability in the drama production. Drama division which accounts for over 80% of its revenue is expected to make constant profit as the number of drama production increases. Additional profit from the office lease will be added to its income statement starting from 2012 as the new building construction was completed in May. Therefore, we believe Pan Entertainment deserves the same valuation to the domestic peer group (production companies such as Chrokbaem and IHQ) which renders a fair PER of 13.9x. Applying the 13.9x PER to 2012E EPS of W725, we derive at a fair share price of W10,000, 68.4% upside potential. 3 4 June 2012 Section 1: Valuation – Target price of W10,000 Trading at the discount premium over the Pan Entertainment has been trading at a huge valuation premium to the market after market and domestic Entertainment it was listed in 2006. The share is currently trading at 2012E PER of 8.2x, which is sector 15.9% discounted to the current market PER of 9.5x. Also, it is trading at 69.5% discounted to the domestic peer group PER of 13.9x. Deserving the peer group PER valuation We believe that Pan Entertainment deserves the average domestic peer group PER on the following reasons: Production company with the best ability in both production and projecting Producing a number of successful dramas such as ‘The Moon that Embraces the Sun’ and ‘Man from the Equator’ since opening the dram production business in 1998 20 talented writers – the largest number in the domestic industry The brilliant group of writers having fine story creation talent High asset value with strong financial structure Recently built office building worth W23.5bn Which is expected to generate W3.6bn in annual rental income 2012E revenue and OP expected to grow Revenue is expected to sharply increase 77.8% yoy as the number of drama 77.8% and 800% yoy respectively productions increase. OP is forecasted to post 800% increase yoy (OPM 11.0%) as revenue increases, and it is expected to maintain the gradual increase in OPM level. Deriving a fair price of W10,000 applied to Therefore, we believe Pan Entertainment deserves the same valuation to the the 13.9x PER to 2012E EPS of W725, domestic peer group which renders a fair PER of 13.9x. Applying the 13.9x PER to 2012E EPS of W725, we derive at a fair share price of W10,000, 68.4% upside potential. Exhibit 1. Pan Entertainment Valuation VS. Market Valuation (X, %) 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012F 2013F 2014F Pan Ent. year-high EV/EBITDA (X) N/L N/L N/L 12.5 (102.8) 414.9 11.2 51.3 47.4 6.4 4.8 3.8 Market year-high EV/EBITDA (X) 8.7 7.9 7.1 11.3 14.2 12.3 11.3 10.3 10.6 7.8 8.7 7.6 Premium/(Discount) to market (%) N/A N/A N/A 10.6 NA 3,269.6 (0.3) 398.1 346.2 (17.6) (44.8) (49.7) Pan Ent.