June 4, 2012 (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 ‘’  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

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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. ‘’ 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.

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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. year-high PER N/L N/L N/L 17.7 145.3 (326.1) 57.6 480.8 163.0 9.6 6.9 5.3 Market year-high PER 19.9 20.7 9.9 17.9 22.3 42.4 20.4 16.0 10.8 10.6 8.3 7.4 Premium/(Discount) to market (%) N/A N/A N/A (1.3) 551.7 NA 183.0 2,909.7 1,409.2 (9.1) (16.8) (27.7) Source: Company data, Leading Research Center *Market = KOSPI + KOSDAQ,

Exhibit 2. Pan Ent. yr-hi EV/EBITDA vs. Market yr-hi Exhibit 3. Pan Ent. year-high PER vs. Market year-high PER EV/EBITDA

450 500 400 400 350 300 300 250 200 200 100 150 100 0 06 07 08 09 10 11 12F 13F 14F 50 -100 0 -200 -50 06 07 08 09 10 11 12F 13F 14F -100 -300

-150 -400 Company EV/EBITDA year-high (X) Market EV/EBITDA year-high (X) Company PER year-high (X) Market PER year-high (X) Source:Fnguide, Leading Research Center Source: Fnguide, Leading Research Center

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Section 2: What is the management philosophy?

CEO, Yung Suk Park, has 25 years job experience in drama production field. He started his career at Pan Production as a CEO in 1988. Starting from 2000, he took the CEO position at Pan Entertainment concurrently with a committee of inspection at Korea Entertainment Producer’s Association (K.E.P.A).

Mr. Park is known as a conservative person. From 25 years of experience, we can assume that he has a discerning eye on the drama production.

Pan Entertainment has a divisional CEO in each division. Jong Sul Park, Jung Su Moon, and Sung Chul Kang are each in charge of Management Strategy, Drama, and Cultural & Entertainment divisions respectively. You can confirm their professionalism in the Management Profile below.

Management Profile

Exhibit 4. Shareholders Exhibit 5. CEO Profile

CEO, Park, Yung Suk Experience / Education

2000~Present CEO, Pan Entertainment

Yung Suk 2004~Present Committee of inspection, K.E.P.A Park & others Experience 2002~2003 Director, KAPP 28.4% 1992~2000 Director, K.E.P.A

1988~2000 CEO, Pan Production Others 71.6% ~1990 Chung-Ang University, Education Art Graduate School

Source: Company data, Leading Research Center

Source: Company data, Leading Research Center

Exhibit 6. Divisional CEOs CEO Period Experience Education

2009 ~ Present Divisional CEO, Pan Entertainment Management Strategy National University Division CEO 2004 ~ 2009 Executive director Major in Law Jong Sul Park 1988 ~ 2008 Lawyer, Law office of North area in Seoul

2011 ~ Present Divisional CEO, Pan Entertainment

2008 ~ 2009 Director, CJ Media drama division

Hankook University of Drama Division CEO 2005 ~ 2008 CEO, DSP ENT. Drama Foreign Studies, Jung Su Moon 2003 ~ 2005 CP, SBS Production Headquarter Major in Economics

> Projected and directed 'What happened in Bali',

'Lovers in Paris, 'Spring days', 'The earth' and more

2007~ Present Divisional CEO, Pan Entertainment Director, KBS Information production division Cultural/ Entertainment 1980 ~ 2006 Manager, Education & information production, Program Seoul National University, Division CEO develop and Project planning in KBS major in Korean Sung Chul Kang > Directed 'The golden bell challenge', '6 o’clock my old

town', 'Global tour', 'Love in Asia' and more Source: Company data, Leading Research Center

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Section 3: Company Snapshot & operations

‘Man from the Equator’ after ‘The Moon Embraces the Sun’

Pan Entertainment = Production Pan Entertainment recently produced two hit television drama series, ‘The Moon that company of ‘The Moon that Embraces Embraces the Sun’ and ‘Man from the Equator’. In early 2012, ‘The Moon that the Sun’ and ‘Man from the Equator’ Embraces the Sun’ recorded 42.3% viewer ratings and Soo-Hyun Kim, the leading actor, became the top star through the drama.

‘Man from the Equator’ was broadcasted followed by ‘The Moon that Embraces the ‘Man from the Equator’ began as the last among Wed/Thu dramas Sun’ in March. Three new drama series including ‘Man from the Equator’ started to - Taking the first in 9th episode be broadcasted on each terrestrial television (MBC, KBS, and SBS) simultaneously on Wednesday and Thursday, drawing a full attention in the market. The first episode of ‘Man from the Equator’ recorded 7.2% ratings while ‘The King 2 Hearts’ was ranked in the first place with 11.5% ratings, and ‘Rooftop Prince’ recorded 10.5% ratings. However, in the 9th episode, ‘Man from the Equator’ took the top place among these three Wednesday/Thursday dramas.

The series finale of ‘Man from the Equator’ aired on May 24th and ‘Bridal Mask’ began broadcasting from May 30th and recoded 12.7% ratings in the first episode taking the first rank.

Growing a media contents company with Pan Entertainment has been growing as a drama-oriented media content provider the first drama ‘Winter Sonata’ in 2002 since the company produced the first drama series ‘Winter Sonata’ in January 2002. - Established in 1998 The company was established in April 1998 as HS Media and changed its name to - Listed in 2006 Pan Entertainment in 2001. The company was listed on KOSDAQ in July 2006.

The drama-oriented media content business is the biggest part of the company. Pan Entertainment also owns 1) entertainment & cultural contents division, 2) music, and 3) celebrity agency business division.

Music division: mainly producing drama Original Sound Track (OST) is the main business in the music unit. Along with the OST drama revenue, drama OST generates profits without additional investment. This is the strength of the company comparing to other competitors.

Agency division: managing celebrities The agency unit generates sales through managing celebrities with Pan through Pan Starscompany Starscompany, the subsidiary of the company. Currently, the unit only contributes 3% to the total revenue, but the company plans to gradually develop the unit.

Lease division: generating revenue from The revenue of office lease will be generated from a new building named Global a new building in Sangamdong from Media Contents Center (GMCC) in Sangamdong from this year. GMCC has 2012 approximately 20,000 m2 of total squares and five stories below and 13 above the ground. Pan Entertainment moved into GMCC in late May. Revenue of office lease is expected to be W1bn in 2012, but it is conservative number regarding only half year.

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Exhibit 7. Revenue portion by division Division Portion (%) 2012E 2011 Drama 81.3 46.9 28.5 Entertainment/ Cultural 8.8 5.1 1.8 Music 3.5 2.0 0.5 Celebrity agency 4.7 2.7 0.9 Others (Lease) 1.7 1.0 0.0 Total 100.0 57.7 31.7

Source: Company data, Leading Research, Non-consolidated IFRS

Through 7~8 drama series productions Pan Entertainment is expected to increase its revenue by 76.4% yoy through seven in 2012, the revenue to be increased or eight drama series productions. We believe that the friendly environment of drama 76.4% yoy outsourcing with seven or eight drama series production which is about twice the last year’s production would increase OPM up to 11.0%. Indeed, an additional profit from office lease is forecasted to increase the revenue and profitability.

Its recently built building, Global Media Contents Center (GMCC), is expected to increase its asset value and improve and stabilize its profitability through office lease.

Drama / Cultural / Entertainment Production

Four Drama productions in 2011 Pan Entertainment recently produced the megahit drama ‘The Moon that Embraces  Drama productions to be doubled the Sun (viewer rating of 42.3%)’, SBS ‘ (47.1%)’, MBC ‘The City of to seven or eight in 2012 Violence (16.3%)’, MBC daily drama ‘Iron Daughter in Law (19.7%)’ and more. Further, Pan Entertainment also produced ‘Famous Seven Princesses’, ‘Winter Sonata’ ‘’ and more in the past.

‘The Moon that Embraces the Sun’, ‘Man In 2011, Pan Entertainment produced four dramas. Seven or eight dramas including from the Equator’, and ‘Can Love one drama series on a general programming channel are expected to be produced in Become Money’ broadcasted in 1H12 2012. Pan Entertainment distributed ‘The Moon that Embraces the Sun’ to MBC in 1Q12 and, ‘Bridal Mask’ is now on the air after ‘Man from the Equator’ was broadcasted. MBN, a new general programming channel, broadcasted ‘Can Love Become Money’ provided by the company in 1Q12. In 2H12, three or four drama series are expected to be produced including ‘My Love, Madam Butterfly’ (SBS).

The revenue of ‘The Moon that Embraces From the past hits, Pan Entertainment was recognized for its drama production, and the Sun’ to be over W10bn ‘The Moon that Embraces the Sun’, which recorded over W10bn revenue, proved the achievement.

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Market forecast

Market growth and intensive competition Competition is very intense in the domestic outsourcing production market with given a surge in the number of explosive growth in the number of production companies since 1999. There are 1,566 production companies registered production companies and 500 closed companies. About 210 companies do not have track records of drama productions for three years.

There are many closed production Most of production companies do not secure planning ability, capital, and companies in the market competitiveness in the market. In the drama section, only 15 production companies - Dominant top five or six companies produced dramas for three years, and five or six companies among them such as such as Pan Ent., Chorokbaem, and Pan Entertainment, IHQ, Chorokbaem, Kimjonghak Production, , IHQ and LKH Production are dominant in the market.

In the drama production market, aggregating data is very difficult to find because most of contracts are dealt in such private manners. We surmise that the market size of outsourced production will grow approximately to W1tr in 2012 from W470bn in 2011 thank to opening of new general programming channels. The outsourcing production is expected to account for 70% of the total drama production market.

Government’s regulation and Korean The government imposes to list outsourcing programs on television networks since Broadcasting Commission’s 1991. Korean Broadcasting Commission recommended over 40% of outsourcing rate recommendation to networks in 2005. This policy led growth of outsourcing production.

Concern about direct production by Although national television networks may directly produce dramas, the possibility is national television networks very remote. Since a large number of writers and producers are under contract with - However, networks lack writers and outsourcing production companies, leaving television networks with lack of producers comparing to production manpower to produce dramas. Thus, a proportion of outsourcing will be sustained at companies. the current level for the next several years. We expect that only 20%~25% of dramas are directly produced by national television networks in the future.

Major factors in the drama production Major factors in the drama production business are; 1) good scenario (securing 1) Scenario writers), 2) casting actor/actress, 3) securing a producer, and 4) business planning 2) Actor/Actress casting ability including program listing on a national television network, sponsorship, 3) Securing a producer overseas sales, and OST. Pan Entertainment secures around 20 creative writers 4) Listing on a national television which are the necessary factor to produce drama series continually. Since writers and network, sponsorship, and producers are freelancers, this factor cannot be considered as the only overseas sales competitiveness of the company. However, a turnover is low in the market because

teamwork between a writer and production company is very important. Pan Entertainment has around 20 writers which is the largest number in the industry.

Beginning of environment change to Since national television networks have provided only 60%~70% of production costs, improve a chronic deficit of the each production company has been running under a deficit. However, production production companies companies currently receive over 80% of production costs from national television networks and improve profitability through additional profits such as the 2nd publication right for cable channels, overseas export, and OST.

Positive environment change through With the Korean wave, TV licensing profit from overseas markets is increasing as increase in overseas sales and number well as contents expand into Central & South America and Southeast Asia from East of export countries with the Korea wave Asia such as Japan and China. Based on this positive environment change for production companies, the company’s overseas revenue through drama export is increased 40% to W122bn in 2010 from W87.3bn in 2008. The growth trend is likely to sustainable in 2012.

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Exhibit 8. Outsourcing costs trend of 3 TV stations Exhibit 9. Amount of export trend of 3 TV stations

(Wbn) (mn $) 400.0 140.0 381.7 121.8 373.1 120.0 102.6 101.4 350.0 360.4 95.4 100.0 89.3 87.3

320.3 80.0 300.0 301.0 55.5 60.0 251.5 265.1 40.0 27.3 250.0 241.1 20.0

200.0 - 2003 2004 2005 2006 2007 2008 2009 2010 2003 2004 2005 2006 2007 2008 2009 2010

Source: Korea Creative Contents Agency, Leading Research Center Source: Korea Creative Contents Agency, Leading Research Center

Exhibit 10. Export breakdown by region (2010) Exhibit 11. Drama revenue trend of Pan Entertainment

Russia Europe Africa 1.3% 0.1% 0.7% USA 1.7% (Wbn) 70.0 57.5 60.0 51.0 46.5 50.0 Other Asia 22.0% Japan 40.0 38.4% 28.5 30.0

20.0 13.1 14.0 14.5 8.1 Taiwan 10.0 3.9 23.2% 0.0 China 2006 2007 2008 2009 2010 2011 2012E 2013F 2014F 12.7%

Source: Korea Creative Contents Agency, Leading Research Center Source: Korea Creative Contents Agency, Leading Research Center

Exhibit 12. Earnings forecast (Wbn) 2010 2011 2012E 2013F 2014F Growth (%) 2011 2012E 2013F 2014F Revenue 18.0 32.7 58.1 67.6 79.5 81.3 77.8 16.3 17.5 Gross profit 2.5 2.9 8.9 11.6 14.2 15.9 205.8 30.0 23.0 Operating profit 0.3 0.7 6.4 8.7 10.9 132.4 799.9 35.3 25.8 Profit before tax 0.2 0.3 6.1 8.6 11.1 25.7 2,123.5 39.6 29.6 Net profit 0.1 0.3 4.8 6.7 8.7 290.3 1,589.3 39.6 29.6 EPS 16 43 725 1,013 1,313 171.7 1,589.3 39.6 29.6 OPM (%) 1.7 2.2 11.0 12.8 13.7 NPM (%) 0.4 0.9 8.2 9.9 10.9 Source: Leading Research Center, Non-Consolidated IFRS

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Section 4: Facts & Figures

Exhibit 13. Revenue and Growth trend Exhibit 14. Operating profit and OPM trend

(Wbn) (%) (Wbn) (%) 29.8 10 26.2 30 100 100 23.5 77.8 25 79.5 8 80 80 81.3 20 88.1 67.6 6 13.7 58.1 60 12.8 15 60 10.5 11.0 40 4 10 40 32.7 17.5 20 2 1.7 2.2 5 16.5 16.2 18.1 18.0 20 15.2 15.9 16.3 6.5 9.6 0 0 13.6 0 0 04 05 06 07 08 09 10 11 12F 13F 14F -5 -20 -3.6 04 05 06 07 08 09 10 11 12F 13F 14F (2) (12.4) -10 -20 -40 (4) -10.7 -15 Revenue (L) Revenue growth (R) Operating profit (L) OP margin (R) Source: Company data, Leading Research Center Source: Company data, Leading Research Center

Exhibit 15. Net profit and NP margin trend Exhibit 16. EPS and EPS growth

(%) (Wbn) (%) 8 1,200 1,800 22.1 24 1,589.3 1,000 1,500

6 17.0 19 800 1,200 14.5 14 10.9 600 900 4 9.9 8.2 9 400 600

4.1 2.7 171.7 2 200 80.2 300 4 29.6 0.9 39.6 0.0 0.0 (0.4) 0.4 0 0 0 -1 04 05 06 07 08 09 10 11 12F 13F 14F 0.0 0.0 0.0 02 03 04 05 06 07 08 09 10 11 12F 13F 14F -200 (5.0) (89.1) (83.1) -300 NP (L) NP Margin (R) EPS (L) EPS growth (R)

Source: Company data, Leading Research Center Source: Company data, Leading Research Center

Exhibit 12. PER Band Exhibit 13. PBR Band

30,000 8,000

25,000 7,000 6,000 20,000 5,000

15,000 4,000

10,000 3,000 2,000 5,000 1,000

0 0 2007-12 2009-03 2010-06 2011-09 2012-12 2014-03 2007-12 2009-08 2011-04 2012-12 2014-08

Adj. Prc. 20.0X 17.5X 15.0X 12.5X 10.0X Adj. Prc. 1.1X 0.9X 0.8X 0.6X 0.5X

Source: FnGuide Source: FnGuide

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Exhibit 19. ROE (%) Exhibit 20. EVA: ROIC less WACC (%)

35 100 30.4 85.4 30 80 25 20.7 18.7 60 20 17.2 14.5 15 40 54.9 10 20 5 0.9 5.1 6.7 1.7 2.0 0.3 9.3 (4.2) 3.1 (0.3) (13.9) (1.5) (7.2) 0 0 05 06 07 08 09 10 11 12F 13F 14F 05 06 07 08 09 10 11 12F 13F 14F -5 -20 Source: Company data, Leading Research Center Source: Company data, Leading Research Center

Exhibit 21. Free Cash Flow trend (Wbn) Exhibit 22. Dividend per share and yield trend

10 (W/sh) (%) 7.8 600 20 6.4 5.5 5 2.0 15 2.5 1.8 400

10 0 04 05 06 07 08 09 10 11 12F 13F 14F 200 (1.4) (1.9) 5 1.5 -5 (4.7) 0.0 0.0 0.0 0.0 0.0 0.5 0.0 0.0 0.0 0.0 0.0 0 0 (7.0) 02 03 04 05 06 07 08 09 10 11 12F 13F 14F -10 (8.7) Dividend per share (L) Dividend yield (R) Source: Company data, Leading Research Center Source: Company data, Leading Research Center

Exhibit 23. Net debt/equity ratio (%) Exhibit 24. Interest coverage (X)

60 39.1 250 220.2 40 26.6 200 20 12.2 7.4 150

0 100 04 05 06 07 08 09 10 11 12F 13F 14F 57.9 21.9 -20 (9.0) 50 14.0 30.2 (16.8) 13.8 20.7 (21.0) 2.0 3.2 -40 (30.6) 0 04 05 06 07 08 09 10 11 12F 13F 14F -60 -50 (34.2) (59.4) (63.9) -100 (85.9) -80 (72.2) Source: Company data, Leading Research Center Source: Company data, Leading Research Center

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Financial Statement Income statement (Wbn) 2006 2007 2008 2009 2010 2011 2012F 2013F 2014F Revenue 16.2 9.6 18.1 15.9 18.0 32.7 58.1 67.6 79.5 % chg yoy 6.5 (40.6) 88.1 (12.4) 13.6 81.3 77.8 16.3 17.5 COGS 9.5 8.5 16.4 12.4 15.5 29.8 49.2 56.0 65.2 Gross profit 6.8 1.2 1.7 3.5 2.5 2.9 8.9 11.6 14.2 GP margin (%) 41.6 12.1 9.3 22.1 13.9 8.9 15.3 17.1 17.9

SG&A 1.9 2.2 2.3 1.8 2.2 2.2 2.5 2.9 3.3 Operating income 4.8 (1.0) (0.7) 1.7 0.3 0.7 6.4 8.7 10.9 Adj. OP margin (%) 29.8 (10.7) (3.6) 10.5 1.7 2.2 11.0 12.8 13.7

Net other income (0.2) 1.1 0.0 0.0 0.1 (0.3) (0.1) 0.0 0.1 Reported OP 4.8 (1.0) (0.7) 1.7 0.3 0.4 6.3 8.7 11.0

Net equity method gains 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Financial income 0.6 0.6 0.7 0.1 0.2 0.1 0.1 0.2 0.4 Financial expenses 0.3 0.0 0.1 0.0 0.2 0.2 0.3 0.3 0.2 Income before tax 4.9 0.6 0.0 1.7 0.2 0.3 6.1 8.6 11.1 Income tax 1.4 0.2 0.1 1.3 0.1 (0.0) 1.4 1.9 2.4 Tax rate (%) 0.3 0.4 4.7 0.8 0.7 (0.0) 0.2 0.2 0.2 Net profit 3.6 0.4 (0.1) 0.4 0.1 0.3 4.8 6.7 8.7 Controlling interest 0.0 0.0 0.0 0.0 0.0 0.3 4.8 6.7 8.7 Non-controlling 0.0 0.0 0.0 0.0 0.0 (0.0) 0.0 0.0 0.0 Other comprehensive inc 0.0 0.0 0.0 0.0 0.0 (0.2) 0.0 0.0 0.0

Total comprehensive inc 3.6 0.4 (0.1) 0.4 0.1 0.1 4.8 6.7 8.7

Balance sheet (Wbn) 2006 2007 2008 2009 2010 2011 2012F 2013F 2014F Current assets 23.3 15.5 14.0 12.8 11.1 11.0 17.2 21.8 25.4 Cash & equivalents 14.1 7.4 1.4 4.0 0.9 1.4 1.7 3.1 3.7 ST financial assets 4.2 0.1 3.2 1.3 2.7 0.0 2.3 4.2 4.9 Accounts receivables 2.4 1.6 3.7 2.7 2.6 2.2 4.1 4.9 6.0 Inventory 0.1 0.4 0.7 0.8 1.1 2.0 3.5 3.9 4.8 Others 2.5 6.1 5.1 4.0 3.9 5.4 5.6 5.7 6.0

Non-current assets 3.8 8.9 9.7 13.0 29.1 37.0 37.1 37.0 37.4 Tangible Assets 0.3 0.9 2.9 6.1 22.9 31.3 31.5 31.8 32.0 LT financial assets 0.7 3.1 1.9 2.0 2.7 2.2 2.2 2.0 2.1 Inv in related co’s 0.0 0.0 0.0 0.2 0.4 0.0 0.0 0.0 0.0 Others 2.8 4.9 4.9 4.7 3.1 3.5 3.4 3.2 3.3 Total assets 27.1 24.4 23.7 25.8 40.2 48.0 54.3 58.8 62.8

Current liabilities 2.6 1.5 2.3 1.6 8.7 7.6 8.7 6.1 5.2 Accounts payables 0.2 0.2 0.9 0.0 0.4 1.4 2.2 2.6 3.5 ST financial liabilities 0.5 0.4 0.1 0.0 7.2 5.4 5.4 2.4 0.0 Others 1.9 0.9 1.3 1.6 1.1 0.8 1.1 1.1 1.7

Non-current liabilities 0.5 0.1 0.1 1.5 1.9 9.7 10.1 10.5 6.8 LT payables 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 LT financial liabilities 0.4 0.1 0.0 1.5 0.1 8.0 8.0 8.0 4.0 Others 0.0 0.1 0.1 0.0 1.9 1.7 2.1 2.5 2.8 Total liabilities 3.1 1.7 2.3 3.1 10.6 17.3 18.8 16.7 12.0

Paid-in capital 2.2 2.2 2.2 2.3 2.3 3.3 3.3 3.3 3.3 Capital surplus 10.2 10.2 10.2 11.1 11.2 11.2 11.2 11.2 11.2 Other comprejensive (0.0) (0.1) (0.3) (0.2) 6.6 6.4 6.4 6.4 6.4 Others 0.0 (1.6) (2.4) (2.5) (2.5) (2.5) (2.5) (2.5) (2.5) Retained earnings 11.6 12.0 11.6 12.0 12.0 12.2 17.0 23.6 32.3 Non-controlling interest 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1 Total shareholder equity 24.0 22.7 21.3 22.6 29.6 30.7 35.4 42.1 50.8

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Free cashflow analysis (Wbn) 2006 2007 2008 2009 2010 2011 2012F 2013F 2014F Net profit 3.6 0.4 (0.1) 0.4 0.1 0.3 4.8 6.7 8.7 Adj. for non-cash exp. 0.3 (0.1) 0.8 0.8 0.9 0.8 0.8 1.0 0.9 Depreciation 0.2 0.5 0.7 0.5 0.4 0.3 0.4 0.4 0.5 Provision for reserves 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Net FX gains (0.0) 0.0 0.0 (0.0) 0.0 0.0 0.0 0.0 0.0 Net eq method gains 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Others 0.1 (0.7) 0.1 0.2 0.4 0.5 0.3 0.5 0.3

Chg in op assets & liab (1.7) (4.1) (0.2) 0.9 0.4 (1.3) (2.5) (0.8) (1.2) Incr in WC (decr) 1.7 (0.6) 1.7 0.0 (0.2) (0.4) 2.5 0.8 1.2 Others (0.1) 4.7 (1.5) (0.9) (0.2) 1.8 0.0 0.0 0.0 Cash from operations 2.3 (3.8) 0.6 2.0 1.3 (0.2) 3.0 6.9 8.4

Capital expenditures 0.3 0.8 2.5 3.5 8.3 8.5 0.5 0.5 0.6 Free cash flow 2.0 (4.7) (1.9) (1.4) (7.0) (8.7) 2.5 6.4 7.8

Dividend 0.0 0.0 0.4 0.1 0.0 0.0 0.0 0.0 0.0 Incr in investment assets 0.0 0.0 0.0 0.2 0.4 0.0 0.0 0.1 0.1 Share issues 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Increase in debt 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Others (8.1) 1.6 3.3 (3.0) 1.5 (3.1) 0.0 0.0 0.0 Net cash flow 6.5 (6.8) (6.0) 2.7 (3.2) 0.6 0.2 1.4 0.6

Beginning cash 7.6 14.1 7.4 1.4 4.0 0.9 1.4 1.7 3.1 Ending cash 14.1 7.4 1.4 4.0 0.9 1.4 1.7 3.1 3.7

Stability ratios 2006 2007 2008 2009 2010 2011 2012F 2013F 2014F Current ratio 886.8 1,009.0 612.2 807.3 128.0 144.7 196.9 355.0 491.8 Quick ratio 60.5 47.5 9.7 31.4 7.8 13.1 9.9 14.2 14.6 Inv. holding period (d) 9.0 23.0 16.3 27.7 36.4 33.8 27.5 28.5 13.5 A/R collection period (d) 44.9 99.5 64.2 60.5 48.2 34.9 28.1 13.1 13.7 A/P period (days) 15.8 8.1 12.4 13.4 4.9 10.7 13.0 15.7 16.8

Interest bear debt (Wbn) 1.0 0.5 0.1 1.5 7.2 13.4 13.4 10.4 4.0 Cash & equivalents (Wbn) 18.3 7.4 4.6 5.3 3.6 1.4 4.0 7.3 8.6 Net int. bear debt (Wbn) (17.3) (7.0) (4.5) (3.8) 3.6 12.0 9.4 3.1 (4.6) Net debt/equity (%) (72.2) (30.6) (21.0) (16.8) 12.2 39.1 26.6 7.4 (9.0) Liability/equity (%) 12.9 7.3 11.0 13.8 35.8 56.5 53.2 39.6 23.6 Interest coverage (X) 21.9 (34.2) (85.9) 220.2 2.0 3.2 20.7 30.2 57.9

Valuations and margins 2006 2007 2008 2009 2010 2011 2012F 2013F 2014F EV/EBITDA (X) 1.7 (34.4) 354.5 10.6 45.1 52.0 5.8 4.4 3.4 EPS (W) 820 89 (18) 93 16 43 725 1,013 1,313 EPS yoy chg (%) (0.0) (0.9) N/A N/A (83.1) 171.7 1,589.3 39.6 29.6 PER (X) 7.2 66.4 N/A 63.6 375.8 138.3 8.2 5.9 4.5 BVPS (W) 6,523 5,204 4,886 5,053 6,440 5,473 5,365 6,378 7,691 P/BVPS (X) 0.9 1.2 1.2 1.2 0.9 1.1 1.1 0.9 0.8 Dividend/sh (W) 0 100 30 0 0 0 0 0 0 Dividend yield (%) 0.0 1.7 0.5 0.0 0.0 0.0 0.0 0.0 0.0

ROE (%) 20.7 1.7 (0.3) 2.0 0.3 0.9 14.5 17.2 18.7 ROA (%) 16.1 1.5 (0.3) 1.7 0.2 0.6 9.4 11.8 14.3 GP margin (%) 41.6 12.1 9.3 22.1 13.9 8.9 15.3 17.1 17.9 OP margin (%) 29.8 (10.7) (3.6) 10.5 1.7 2.2 11.0 12.8 13.7 NP margin (%) 22.1 4.1 (0.4) 2.7 0.4 0.9 8.2 9.9 10.9 EBITDA margin (%) 31.3 (5.7) 0.3 13.9 3.8 3.0 11.7 13.4 14.3

ROIC (%) 66.9 (5.9) 15.0 2.3 0.4 1.9 11.4 15.0 18.6 WACC (%) 12.0 8.0 5.7 3.9 4.6 9.1 8.3 9.8 11.9 ROIC less WACC (%) 54.9 (13.9) 9.3 (1.5) (4.2) (7.2) 3.1 5.1 6.7

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▶ Ratings and target price history in past two years Pan Entertainment (068050KQ) Date 2012-06-04 Rating BUY Target price 10,000

▶ Target price changes in past two years

(Won) Stock Price Target Price

8,000

6,000

4,000

2,000

0 11/06 11/09 11/12 12/03 12/06

▶ Investment period and ratings

Company BUY The stock is expected to outperform the market by at least 15%p over the next 12 months. HOLD The stock is expected to either outperform or underperform the market by less than 15%p over the next 12 months. SELL The stock is expected to underperform the market by at least 15%p over the next 12 months

Industry OVERWEIGHT Industry indicators are expected to outperform the by at least 5%p over the next 12 months. NEUTRAL Industry indicators are expected to be in line with the market within 5%p over the next 12 months. UNDERWEIGHT Industry indicators are expected to underperform the market by at least 5%p over the next 12 months © . 2012 Leading Investment & Securities Co. All rights reserved

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