SM Entertainment: No limits for the expansion of artists’ intellectual property

The author is an analyst at KB Securities. She can be contacted at [email protected] — Ed.

Maintain BUY and TP of KRW100,000

We are maintaining BUY and TP of 100,000 KRW for SM Entertainment (SM). We forecast an OP 2022E-2024E CAGR of 22.9% for SM. Our DCF-based TP assumes a WACC of 9.81% (9.82% COE; 4.49% COD after tax; 1.08 52w adj. beta), an EV/EBITDA exit multiple of 2.1x and a implied terminal growth rate of 2.30% (from 2023E). Our TP implies 25.4x 12m FWD implied P/E and 2.86x P/B, and offers upside potential of 61.6% (vs. July 1 close).

Loyal fandoms, potential for expanding artist business through units, revenue diversification through platform businesses

We forecast a CAGR OP 2022E-2024E of 22.9% for SM, given that: (1) the company, synonymous with the history of idol groups in Korea, has very loyal fandoms that help ensure strong album sales; (2) the expansion of artists’ activity via units, not only intra-group but also inter-group, should create synergies; and (3) the company diversified its revenue base with the addition of its platform business, operated by subsidiaries Beyond Live Corporation and DearU.

Transparency ensured following shareholder activism

Despite increasing company value through the company’s artist management business as well as the platform businesses of its subsidiaries, SM shares traded at a discount due to a governance problem concerning its main shareholder. Namely, SM was deemed to pay an excessive amount of royalties to Like Planning, a production company owned by SM’s biggest shareholder and executive producer, Lee Soo-man. However, in a move seen as having improved management transparency, SM recently appointed an auditor recommended by Align Partners Capital Management.

OP of 2Q22E of KRW 20.1 bn (-27.0% year-on-year), in line with consensus

We forecast 2Q22E consolidated revenue of KRW 182.5 billion (-2.1% YoY, +7.7% QoQ) and OP of KRW 20.1 billion (-27 .0% YoY, +4.4% QoQ; 11.0% OPM); our OP estimate is in line with the market consensus of KRW 20.8 billion. Album sales are expected to be supported by NCT ​​DREAM’s second repackaged album, Beatbox, while growth is expected to have been supported by NCT ​​127’s world tour in Japan. However, there is a risk that there will be a lag of one to three months before financial settlements for concerts in Japan are completed.

Kimberly B. Nguyen