SM Entertainment (041510.KQ) BUY / TP KRW36,000 March 12, 2020 Travel/Casino/Entertainment/Small-Cap Peter Yoo +822-3787-2574 Airrio@Hmsec.Com

Home , KeyEast, SM Entertainment

Company Note SM Entertainment (041510.KQ) BUY / TP KRW36,000 March 12, 2020 Travel/Casino/Entertainment/Small-cap Peter Yoo +822-3787-2574 [email protected]

4Q19 misses consensus

Share price (KRW, Mar 11) 26,100 1) Investment highlights Upside (%) 37.9 We maintain BUY on SM but revise down our target price to KRW36,000. Market cap (KRW bn) 612 Dream Maker’s earnings were hit by the delayed release of EXO’s repackaged album and fewer concert Shares outstanding (’000) 23,447 dates. Paid-in capital (KRW bn)/Face value (KRW) 12/500 SM C&C’s profit grew and SM Japan benefitted from 610,000 concertgoers whereas Keyeast remained in 52-week high/low (KRW) 49,950/26,100 the red. 60-day avg. daily T/O (KRW bn) 7 As the rapid spread of the Wuhan coronavirus has caused the cancellation and postponement of all concerts Foreign ownership (%) 18.21 Major shareholders (%) Lee Su Man and since March, we revise down our 1Q20 earnings forecasts. seven others 19.22 2) Major issues and earnings outlook Price performance 1M 3M 6M SM’s 4Q19 results fell short of consensus expectations, with sales coming in at KRW193.9bn (-7% YoY) and Absolute (%) -23.5 -27.9 -17.5 Relative (%p) -12.3 -23.8 -12.7 operating profit at KRW13.8bn (-9.4% YoY). K-IFRS, consolidated The release of EXO’s repackaged album has been postponed to 1Q20. Fewer concert dates in 4Q19 resulted

(KRW) 19F EPS 20F EPS TP in an operating profit of KRW300mn for Dream Maker. Previous 763 1,621 50,000 SM C&C posted KRW3.3bn in operating profit on growing ad revenue. SM Japan posted KRW3.9bn in Revised 916 1,157 36,000 operating profit on the back of 610,000 concertgoers. On the other hand, Keyeast posted an operating loss Consensus 778 1,538 45,333 of KRW500mn. Difference (%) 17.7 -24.8 -20.6 A new girl group is slated to debut in 1H20, and a new boy group in 2H20.

Earnings deterioration in 1H20 is unavoidable because of the rapid spread of the Wuhan coronavirus. Key 12-month price performance subsidiaries including Dream Maker are likely to suffer earnings declines. The F&B business is also likely to

140 suffer from the outbreak. Subsidiary Everysing still remains in the red and SM Beijing is also falling victim 120 to the contagion. 100 On the non-operating side, 4Q19 recognized an equity-method loss of KRW8bn from Dreamus Company, an 80 60 investment asset impairment of KRW6bn from SMC, and goodwill impairment of KRW13bn from Everysing. 40 SM Entertainment 20 KOSDAQ 3) Share price outlook and valuation 0 19.03 19.06 19.09 19.12 20.03 Shares suffered severe corrections as it has become difficult for artists to perform live amid the rapid Source: WiseFn, Hyundai Motor Securities growth of the Wuhan coronavirus outbreak. We believe it will be difficult for earnings and shares to recover unless the outbreak is brought under control. For our target price, we applied 31.1x target P/E to 2020F EPS of KRW1,134.

Earnings forecasts and valuations Sales OP NP EBITDA EPS Growth P/E P/B EV/EBITDA ROE Div. yield (KRW bn) (KRW bn) (KRW bn) (KRW bn) (KRW) (%YoY) (x) (x) (x) (%) (%) 2017 350 21 4 44 169 -83.9 153.0 1.7 11.0 1.2 0.0 2018 365 11 4 33 199 17.6 174.4 2.2 21.5 1.3 0.0 2019F 666 48 22 111 947 -30.4 41.8 2.0 7.3 4.9 0.0 2020F 841 66 49 119 2,091 120.7 19.0 1.8 6.1 9.9 0.0 2021F 886 71 53 118 2,270 8.6 17.5 1.6 5.5 9.7 0.0 Note: K-IFRS, consolidated

COMPANY NOTE

Fig 1. 2Q19 earnings preview Earnings Growth HMS Consensus (KRW bn) 4Q18F 3Q19 4Q19F (%YoY) (%QoQ) 4Q19F %difference 4Q19F %difference

Sales 208 173 193.9 -6.8 12.1 214.7 -9.7 211.0 -8.1

Operating profit 15 20 13.8 -8.0 -31.0 16.1 -14.3 15.8 -12.8

OPM (%) 7.2 11.6 7.1 7.5 7.2

Pretax profit 9 22 -17.6 TR TR 16.4 N/A 14.2 N/A

Net profit (CI) 1 9 -22.5 TR TR 11.2 N/A 13.0 N/A

Note: K-IFRS, consolidated Source: Hyundai Motor Securities

Fig 2. Quarterly earnings trends

(KRW bn) 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19F 2018 2019F 2020F

Sales 110.6 124.4 168.7 208.5 130.8 159.6 173.5 193.9 612.2 657.8 549.8

SME 59.4 60.4 65.7 95.9 57.0 64.6 83.7 102.2 281.5 307.5 291.1

SM Japan 26.3 16.3 20.4 31.9 14.9 16.0 20.1 28.4 94.9 79.4 69.2

Dream Maker 6.7 12.4 17.9 21.3 16.3 14.0 29.4 19.9 58.3 79.6 56.6

SM C&C 37.5 52.5 44.5 62.5 35.2 42.7 39.8 48.8 197.0 166.6 200.1

KEYEAST 37.8 21.4 23.4 33.3 21.7 21.9 59.2 100.2 92.1 Interco transaction -19.3 -17.2 -17.6 -24.5 -16.0 -11.0 -21.2 -27.3 -78.7 -75.5 -67.1 adjustment Operating profit 10.4 10.0 12.1 15.2 2.8 3.9 19.9 13.8 47.7 40.4 37.3

OPM (%) 9.4 8.0 7.2 7.3 2.1 2.4 11.5 7.1 7.8 6.1 6.8

Net profit 11.4 4.0 7.3 0.7 7 0.7 9.3 -22.5 23.4 -16.5 27.4

Net margin (%) 10.3 3.3 4.3 0.3 -2.8 0.4 5.4 -11.6 3.8 -2.5 5.0

Note: K-IFRS, consolidated Source: Hyundai Motor Securities

Fig 3. Earnings revisions Revised Previous %change (KRW bn) 2019F 2020F 2019F 2020F 2019F 2020F Sales 657.8 549.8 678.6 798.9 -3.1 -31.2 Operating profit 40.3 37.3 42.7 55.2 -5.6 -32.5 Pretax profit 42.5 38.7 44.9 57.0 -5.4 -32.0 Net profit - 16.2 27.1 17.5 38.8 TR -30.1 Note: K-IFRS, consolidated Source: Hyundai Motor Securities

Fig 4. Sales trend Fig 5. Operating profit and margin trends

(KRW bn) Sales (L) %YoY (KRW bn) OP (L) OPM (R) 250 120% 25 25% 100% 200 20 20% 80%

150 60% 15 15% 40% 10 10% 100 20% 0% 5 5% 50 -20% 0 0% 0 -40% 1Q13 1Q14 1Q15 1Q16 1Q17 1Q18 1Q19 1Q13 1Q14 1Q15 1Q16 1Q17 1Q18 1Q19 -5 -5%

Source: Company data, Hyundai Motor Securities Source: Company data, Hyundai Motor Securities

Fig 6. Sales trends by region Fig 7. Sales composition by region

(KRW bn) South Korea Japan China Others South Korea Japan China Others 450 70% 400 60% 350 50% 300 250 40% 200 30% 150 20% 100 50 10% 0 0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: Company data, Hyundai Motor Securities Source: Company data, Hyundai Motor Securities

Fig 8. P/E bands Fig 9. P/B bands

Price 45.0 40.0 Price 9.0 7.0 (KRW’000) (KRW’000) 40 35.0 30.0 25.0 20 5.0 3.0 1.0

20 15

0 10 -20

5 -40

-60 0 17/01 18/01 19/01 20/01 17/01 18/01 19/01 20/01

Source: Dataguide, Hyundai Motor Securities Source: Dataguide, Hyundai Motor Securities

3 COMPANY NOTE

Income statement Balance sheet (KRW bn) 2017 2018 2019F 2020F 2021F (KRW bn) 2017 2018 2019F 2020F 2021F Sales 365 612 666 841 886 Current assets 441 537 608 729 849 Change (%) 4.4 67.6 8.8 26.3 5.4 Cash and cash equivalents 195 237 318 423 525 Cost of goods sold 249 410 450 563 594 Short-term investment assets 3 45 43 46 48 % of sales 68.1 66.9 67.6 67.0 67.0 Accounts receivable 121 124 120 127 134 Gross profit 116 203 216 277 292 Inventory assets 9 12 11 12 12 Gross margin (%) 31.9 33.1 32.4 33.0 33.0 Other current assets 113 119 116 122 129 Change (%) 13.8 74.1 6.5 28.6 5.4 Non-current assets 357 465 466 436 412 SG&A expenses 105 155 168 211 222 Tangible assets 93 93 88 79 73 % of sales 28.9 25.3 25.2 25.1 25.0 Intangible assets 113 186 188 159 135 EBITDA 33 88 111 119 118 Investment assets 127 152 130 138 145 EBITDA margin (%) 9.0 14.3 16.7 14.2 13.3 Other non-current assets 23 34 60 60 60 Change (%) -25.4 166.3 26.5 7.5 -1.4 Other financial assets 0 0 0 0 0 Operating profit 11 48 48 66 71 Total assets 798 1,002 1,074 1,165 1,261 Operating margin (%) 3.0 7.8 7.2 7.9 8.0 Current liabilities 330 394 391 426 461 Change (%) -47.2 336.4 0.3 38.1 7.3 Short-term debt 11 7 7 7 7 Non-operating profit -7 5 5 1 2 Accounts payable 124 179 173 183 193 Interest income 2 8 4 1 1 Current portion of long-term debt 37 36 44 60 76 Interest expenses 7 4 4 4 5 Other current debt 159 172 166 176 185 Other non-operating income -2 0 5 4 6 Non-current liabilities 31 32 50 51 53 Subsidiaries/affiliate income 21 -6 -4 2 2 Bonds 6 7 7 7 7 Pretax profit from cont ops 24 46 50 69 75 Long-term debt 5 3 3 3 3 Pretax margin (%) 6.7 7.5 7.5 8.2 8.4 LT financial debt (incl. lease) 0 0 19 19 19 Change (%) 8.0 88.4 7.9 38.4 8.6 Other non-current debt 20 22 21 22 24 Income tax 29 23 29 14 15 Other financial liabilities 0 0 0 0 0 Profit from continuing ops -5 23 22 55 60 Total liabilities 362 426 441 477 514 Profit from discontinuing ops 0.0 0.0 0 0 0 Owners of parent equity 344 424 473 522 575 Net profit -5 23 22 55 60 Paid-in capital 11 12 12 12 12 Net margin (%) -1.3 3.8 3.4 6.5 6.7 Capital surplus 170 219 244 244 244 Change (%) TR TB -4.7 146.1 8.6 Capital adjustment, etc. 32 30 28 28 28 NP from controlling interest 4 31 22 49 53 Other accumul earnings and comp income -3 -10 -8 -8 -8 NP from non-controlling interest -9 -7 0 6 6 Retained earnings 134 174 196 245 299 Other comprehensive income -7 4 5 0 0 Non-controlling interest 91 152 160 166 173 Total comprehensive income -12 27 27 55 60 Total equity 436 576 633 688 748

Cash flow Key financial data (KRW bn) 2017 2018 2019F 2020F 2021F (KRW, x, %) 2017 2018 2019F 2020F 2021F Operating cash flow 77 120 87 114 113 EPS (based on net profit) -216 1,042 958 2,343 2,544 Net profit -5 23 22 55 60 EPS (based on parent net profit) 199 1,361 947 2,091 2,270 Depreciation on tangible assets 11 13 26 24 22 BPS (based on total equity) 20,024 25,019 27,006 29,349 31,893 Amortization on intangible assets 11 27 37 29 24 BPS (based on owners of parent equity) 15,824 18,424 20,160 22,252 24,522 FX-related profit 4 0 -1 0 0 DPS 0 0 0 0 0 Dec (inc) in working capital 46 52 -9 6 6 P/E (based on net profit) N/A 50.2 41.4 16.9 15.6 Others 10 4 12 0 0 P/E (based on parent net profit) 174.4 38.4 41.8 19.0 17.5 Investing cash flow -111 -127 -8 -26 -26 P/B (based on total equity) 1.7 2.1 1.5 1.4 1.2 Dec (inc) in investment assets -28 -25 22 -7 -7 P/B (based on owners of parent equity) 2.2 2.8 2.0 1.8 1.6 Decrease in tangible assets 7 1 0 0 0 EV/EBITDA (reported) 21.5 12.9 7.3 6.1 5.5 Increase in tangible assets -11 -10 -14 -16 -16 Dividend yield 0.0 0.0 0.0 0.0 0.0 Others(capex) -79 -93 -16 -2 -2 Growth (%) Financing cash flow 64 46 -2 16 16 EPS (based on net profit) TR TB -8.1 144.7 8.6 Increase (decrease) in debt -5 -6 18 0 0 EPS (based on parent net profit) 17.6 583.9 -30.4 120.7 8.6 Increase (decrease) in bond 6 1 0 0 0 Profitability (%) Increase in capital 6 49 25 0 0 ROE (based on net profit) -1.2 4.6 3.7 8.3 8.3 Dividend 0 0 0 0 0 ROE (based on parent net profit) 1.3 8.0 4.9 9.9 9.7 Others 57 2 -46 16 16 ROA -0.7 2.6 2.2 4.9 4.9 Other cash flow -5 3 4 0 0 Stability (%) Increase (decrease) in cash 26 42 80 105 103 Total liabilities/equity 83.1 74.0 69.6 69.3 68.7 Beginning cash 170 195 237 318 423 Net debt/equity Net cash Net cash Net cash Net cash Net cash Ending cash 195 237 318 423 525 Interest coverage 9.1 18.7 14.3 16.4 15.0 Note: K-IFRS, consolidated

4 Investment rating and target price history Two-year price chart Difference (%) Date Rating TP Average High/Low 18/07/24 BUY 50,000 -19.8 -17.5 (KRW’000) 18/08/16 BUY 50,000 -8.5 4.4 80 18/10/17 BUY 60,000 -21.9 -12.3 70 18/11/15 BUY 70,000 -26.4 -19.9 60 19/01/25 BUY 70,000 -28.8 -19.9 19/03/11 BUY 70,000 -32.7 -19.9 50 19/04/18 BUY 56,000 -27.4 -24.3 40 19/05/16 BUY 56,000 -26.5 -14.4 30

19/07/22 BUY 50,000 -35.1 -28.1 20 19/08/16 BUY 35,000 -8.7 6.4 SM Entertainment 10 Target price 19/10/17 BUY 45,000 -17.2 -11.9 0 19/11/19 BUY 50,000 -26.7 -22.0 18.03 18.06 18.09 18.12 19.03 19.06 19.09 19.12 20.03 20/02/06 BUY 50,000 -30.1 -22.0 20/03/12 BUY 36,000 - -

Compliance note • The author(s) of this report does(do) not have any interests in the company(ies) covered herein. • Hyundai Motor Securities has not disclosed the material contained in this report to any institutional investor or third party prior to its publication. • The author(s) of this report does(do) not own more than 1% of the shares of the company(ies) covered in this report. • Hyundai Motor Securities has not taken part in securities issuance (DR, CB, IPO, and market making) of the company(ies) covered in this report as lead manager for the past six months. • This report accurately reflects the author(s)’s professional views and was written without any undue external influence or interference.

Investment rating Hyundai Motor Securities offers three sector investment ratings based on six-month forward fundamentals and share price outlook. • OVERWEIGHT: Sector-wide fundamentals and share prices are expected to turn up. • NEUTRAL: No meaningful fundamental improvement is expected. • UNDERWEIGHT: Sector-wide fundamentals and share prices are expected to turn down.

Hyundai Motor Securities offers three company investment ratings based on the relative return expected in the following six months, based on the closing price on the date of rating declaration. • BUY: Excess return of +15%p or more • MARKETPERFORM (M.PERFORM): Excess return of between -15%p and +15%p • SELL: Excess return of -15%p or less

Stock ratings distribution (January 01, 2019-December 31, 2019) Rating Count % of rating category BUY 135 85.99 MARKETPERFORM 22 14.01 SELL 0 0

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