SM Entertainment (041510 KQ) Entertainment
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September 29, 2011 Company Report SM Entertainment (041510 KQ) Entertainment K-pop wave to sweep from Japan through the Americas Chang-kwean Kim +822-768-4321 [email protected] Raise TP to W57,000 to reflect our higher earnings estimates Jee-hyun Moon We reiterate our Buy call on SM Entertainment and raise our target price to W57,000 +822-768-3615 (from W42,000). We revised up our 2011 and 2012 EPS estimates by 6.4% and [email protected] 15.3%, respectively, to reflect the companyÊs greater-than-expected success in Japan as well as the benign environment (e.g., yen appreciation). In addition, the music industryÊs 2012F average P/E (a proxy for SMÊs valuation) increased, as related music companiesÊ shares rose. We maintain our assumption for SMÊs 2011 Japanese album sales volume (630,000 copies)·which is a key earnings driver·while raising our 2012 and 2013 assumptions to 2.51mn copies (from 2.19mn copies) and 2.82mn copies (from Buy (Maintain) 2.38mn copies), respectively. Although Japanese album sales stagnated for more Target Price (12M, W) 57,000 than a quarter in 2011 in the wake of the earthquake, SMÊs Japanese album sales Share Price (11/09/28,W) 43,550 have thus far reached 1.61mn copies (excluding the TVXQ album released on Expected Return (%) 30.9 September 28th), vs. 940,000 copies in 2009. In 2011, SMÊs artists are expected to EPS Growth (11F, %) -14.7 attract 545,000 fans to Japanese concerts (vs. 374,000 fans in 2009). The number of Market EPS Growth (11F, %) 6.4 P/E(11F, x) 38.0 concert attendees is likely to double in 2012, given that TVXQ is scheduled to Market P/E(11F, x) 9.2 embark on an arena concert tour (estimated to attract 228,000 fans) in 1Q12. KOSDAQ 434.20 Market Cap (Wbn) 722 Earnings momentum likely to continue through 2012 Shares Outstanding (mn) 17 In 3Q, SM is believed to have begun generating robust earning momentum from Avg Trading Volume (60D, '000) 1,194 Japan, as the company resumed staging highly profitable Japanese concerts (which Avg Trading Value (60D, Wbn) 40 were put on hold in July 2009) in December 2010 (there is a time lag between Dividend Yield (11F, %) 0.0 Free Float (%) 75.6 concerts and the recognition of related sales). In addition, GirlsÊ Generation is 52-Week Low 14,200 scheduled to release a domestic full-length album on October 4th, which brightens 52-Week High 46,050 the companyÊs 2H earnings outlook. We project SMÊs 3Q revenues and operating Beta (12M, Daily Rate of Return) 0.6 profit to reach W23.4bn and W5.3bn in 3Q and W27.9bn and W11.3bn in 4Q. Price Return Volatility (12M 3.9 Daily, %,SD) Foreign Ownership 4Q New York and South American concerts to confirm global competitiveness 8.1 (%) In June, SM Town concerts in Paris confirmed SMÊs potential in Europe, the worldÊs Major Shareholder(s) largest music market. Going further, SM is about to test its long-term potential in the Soo-man Lee (24.39%) worldÊs second-largest market by holding concerts in the U.S. and in South America Partners Venture Capital and et. al (7.24%) (tentatively in Peru). Once the company can confirm its competitiveness in the KB Asset Mgmt. (6.94%) Price Performance Americas in 4Q, the companyÊs value should skyrocket. (%) 1M 6M 12M Absolute 37.4 149.6 145.4 Relative 40.5 165.8 152.5 § Earnings & Valuation Metrics FY Revenues OP OP Margin NP EPS EBITDA FCF ROE P/E P/B EV/EBITDA Share price (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (x) (x) (x) 290 KOSDAQ 12/09 62 9 15.0 5 278 12 10 7.3 16.2 1.2 3.5 240 12/10 86 26 29.5 22 1,342 28 26 29.1 12.6 3.3 8.1 12/11F 92 21 22.8 19 1,145 25 16 19.2 38.0 6.9 26.1 190 12/12F 166 69 41.4 59 3,566 72 47 42.0 12.2 4.4 8.5 140 12/13F 184 81 43.8 71 4,288 83 63 34.6 10.2 3.1 6.6 90 Note: All figures are based on non-consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates 40 9/10 1/11 5/11 9/11 Please read carefully important disclosures at the end of this report. September 29, 2011 SM Entertainment Table 1. Annual earnings forecasts (Wbn,%) 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F Sales 20.7 29.3 31.3 40.1 61.8 86.4 91.9 166.4 183.9 CD 7.5 8.8 8.9 10.8 14.6 14.9 16.0 16.8 17.6 Digital music 1.9 4.0 4.4 4.8 9.5 8.5 7.2 9.4 13.3 Overseas 6.0 4.8 5.6 8.6 15.8 36.8 37.2 107.2 118.1 CD 0.1 0.3 0.7 0.8 0.7 1.2 2.2 2.7 2.8 Royalty 5.8 4.5 5.0 7.8 15.0 35.6 34.9 104.5 115.4 Management 5.4 11.7 12.4 16.0 21.9 26.2 31.6 33.0 34.8 Sales breakdown CD 36.2 29.9 28.4 26.9 23.7 17.3 17.4 10.1 9.6 Digital music 9.0 13.7 14.0 11.9 15.3 9.8 7.9 5.6 7.2 Overseas 28.8 16.5 18.0 21.4 25.5 42.6 40.4 64.4 64.3 Management 26.0 39.9 39.6 39.8 35.5 30.3 34.3 19.9 18.9 Albums sold (Â000) 1,011 1,182 1,201 1,283 1,741 1,777 1,900 2,000 2,100 ASP (W) 7,400 7,400 7,400 8,400 8,400 8,400 8,400 8,400 8,400 Digital/CD sales 24.9 45.7 49.4 44.3 64.8 57.0 45.4 55.7 75.4 Management/CD sales 71.8 133.5 139.7 148.0 149.7 175.4 197.7 196.6 197.1 COGS 15.6 25.4 29.1 35.8 41.8 48.7 55.3 79.8 84.2 Gross profit 6.5 4.5 4.2 7.6 20.0 37.7 36.6 86.5 99.7 Gross profit margin 29.4 15.1 12.5 17.5 32.3 43.6 39.8 52.0 54.2 Operating profit 1.2 -2.3 -3.7 -1.7 9.3 25.5 21.0 68.9 80.6 OP margin 5.6 -7.7 -21.4 10.4 9.9 26.2 22.8 41.4 43.8 Pretax profit 1.1 -2.9 -7.1 4.5 6.1 22.6 18.1 74.4 88.4 Pretax margin 5.2 -9.6 -21.4 10.4 9.9 26.2 19.7 44.7 48.1 Net profit 1.2 -4.0 -7.6 4.3 4.5 21.8 18.9 58.8 70.7 Net margin 5.4 -13.5 -23.0 9.8 7.2 25.2 20.5 35.3 38.5 YoY growth Sales 41.6 7.1 27.9 54.1 39.9 6.4 81.0 10.5 CD 17.0 1.6 21.3 35.7 2.1 6.9 5.3 5.0 Digital music 115.1 9.7 8.9 98.1 -10.2 -14.9 29.3 42.1 Overseas -19.0 17.0 52.0 84.1 133.1 1.1 188.3 10.2 Management 117.5 6.3 28.4 37.3 19.6 20.5 4.7 5.3 Operating profit TTR RR RR TTB 174.9 -17.6 228.4 17.0 Net profit TTR RR TTB 4.5 387.7 -13.4 211.4 20.2 Note: On a non-consolidated basis under K-IFRS since 2011 Source: Company data, KDB Daewoo Securities Research Table 2. 2011~2012 Earnings forecast revisions (Wbn, W, %) Previous Revised % Diff. 2011F 2012F 2011F 2012F 2011F 2012F Sales 91.9 154.3 91.9 166.4 0.0 7.8 Operating profit 20.2 61.1 21.0 68.9 3.9 12.8 Net profit 17.8 51.0 18.9 58.8 6.1 15.3 EPS 1,077 3,094 1,145 3,566 6.4 15.3 OP margin 22.0 39.6 22.8 41.4 Net margin 19.4 33.1 20.5 35.3 Note: On a non-consolidated basis under K-IFRS Source: KDB Daewoo Securities Research Daewoo Securities Research 2 September 29, 2011 SM Entertainment Table 3. Overseas sales assumptions (%, Wbn, Â000 copies) 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F Market share 0.4 0.3 0.4 0.5 1.1 3.3 2.2 8.7 9.8 Royalties from Japan 3.7 3.0 3.5 5.3 9.7 28.3 27.4 96.4 106.3 Sales from Japan 18.3 14.8 17.4 26.4 48.6 141.5 91.4 321.5 354.5 Sales from other countries 2.3 1.9 2.2 3.3 6.1 8.5 9.8 10.7 11.8 # of CDs sold in Japan TVXQ (5) 300 940 - - - GirlsÊ Generation - - 350 940 940 SHINee - - - 310 470 Super Junior - - - 310 470 TVXQ (2) - - 280 940 940 Total 300 940 630 2,510 2,820 Source: KDB Daewoo Securities Research Table 4.