June 24, 2011 Company Report SM Entertainment (041510 KQ) Entertainment An irresistible Buy! Chang-kwean Kim +822-768-4321
[email protected] Global expansion efforts beginning to bear fruit Jee-hyun Moon SM Entertainment (SM) is growing as a global player in the music industry, tapping +822-768-3615 into the European, North American, and South American markets (on top of the
[email protected] Asian market). Indeed, songs, music videos, and concert footage featuring SM artists are spreading around the world through social media websites such as YouTube and Facebook. The global music market should offer numerous new opportunities to SM, especially considering the companyÊs content development capability has proven to be superior to that of its domestic rivals. Maintain Buy rating with TP of W30,000 Buy (Maintain) SMÊs shares have remained stagnant since early this year, due to: ① low earnings Target Price (12M, W) 30,000 predictability (earnings are dependant on the success/failure of songs); ② Share Price (06/23/11, W) 18,900 uncontrollable risks inherent to the industry (scandals, etc.); ③ sell-offs by large Expected Return (%) 58.7 shareholders; and ④ deterioration of quarterly earnings. However, we expect the EPS Growth (11F, %) -32.9 stock to break out of its current trading range, given the companyÊs Japanese Market EPS Growth (11F, %) 23.4 earnings momentum. P/E (11F, x) 21.0 Market P/E (11F, x) 10.4 The surprising success of SMÊs artists in Japan should translate into full-swing KOSDAQ 464.62 earnings growth in 2012. The companyÊs P/E (based on a 2012F EPS) is 7.2x, Market Cap (Wbn) 313 which seems extremely undervalued compared to the domestic peer groupÊs Shares Outstanding (mn) 17 average P/E of 15.4x.