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.