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SM Entertainment: no limit for artist IP expansion

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

Maintain BUY and TP of KRW100.000

We keep BUY and TP of KRW100,000 for SM Entertainment (SM). We expect an OP 2022E-2024E CAGR of 22.9% for MS. Our DCF-based TP assumes 9.81% WACC (9.82% COE; 4.49% COD after tax; 1.08 52w adj.beta), 2.1x EV / EBITDA and 2 output multiples, 30% implicit terminal growth rate (from 2023E onwards). Our TP implies 25.4x 12m FWD implied P / E and 2.86x P / B and offers a potential upside of 61.6% (versus the close on 1 July).

Loyal fandoms, potential expansion of artists’ business through units, diversification of revenues through platform activities

We expect an OP 2022E-2024E CAGR of 22.9% for SM, as: (1) the company, synonymous with the history of idol groups in Korea, boasts highly loyal fandoms that help ensure strong album sales; (2) the expansion of artistic activity through 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 businesses, managed by its subsidiaries Beyond Live Corporation and DearU.

Transparency ensured by shareholder activism

Despite the increased corporate value resulting from the company’s artist management business and the platform activities of its subsidiaries, SM’s shares were exchanged at a discount due to a governance issue related to its largest shareholder. Namely, SM was believed to be paying an excessive amount of royalties to Like Planning, a production company owned by SM’s largest shareholder and executive producer, Lee Soo-man. However, in a move believed to have improved management transparency, SM recently appointed an auditor recommended by Align Partners Capital Management.

OP 2Q22E of KRW 20.1 billion (-27.0% YoY), in line with the consensus

We expect consolidated revenues for 2Q22E of KRW 182.5 billion (-2.1% yoy, + 7.7% yoy) and OP of KRW 20.1 billion (-27.0% yoy , + 4.4% quarterly; 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’s repackaged second album DREAM Beatbox, while growth is likely to have been buoyed by NCT ​​127’s world tour in Japan. However, there is a risk that there may be a delay of one to three months until the financial arrangements for the concerts in Japan are completed.

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