SM Entertainment (041510 KQ) Entertainment
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May 31, 2012 Company Report SM Entertainment (041510 KQ) Entertainment Daewoo Securities Co., Ltd. Spread of smart devices to lead to increased music consumption Chang-kwean Kim +822-768-4321 Digital music revenues to expand on launch of iTunes and improved pricing [email protected] We expect the global and domestic digital music markets to show robust growth until 2015 (at CAGRs of 11.6% and 14.9%, respectively). AppleÊs launch of iTunes in Korea should boost digital music demand. And the governmentÊs anticipated introduction of a pay-per-streaming/download system should lead to unit price hikes. The growth of the smart TV (e.g., Apple TV) market should boost traffic to music videos as well as help facilitate the development of SM EntertainmentÊs drama Buy (Maintain) business. In 2011, SM generated W4bn in advertising revenues related to its YouTube music videos and W6.2bn in digital music revenues. The gross margin of Target Price (12M, W) 57,400 Share Price (05/30/12, W) 40,500 the digital music business came in at a whopping 80%. Expected Return (%) 41.7 EPS Growth (12F, %) 151.5 Maintain Buy call with TP of W57,400 Market EPS Growth (12F, %) 19.1 We maintain our Buy call on SM Entertainment with a target price of W57,400. We P/E (12F, x) 13.0 raised our 2012 and 2013 EPS estimates by 2.4% and 10.4%, respectively, to Market P/E (12F, x) 9.3 reflect the companyÊs 1Q results. We project the companyÊs 2012 revenues and KOSDAQ 469.62 operating profit to soar by 71.2% YoY and 249.4% YoY, respectively. Market Cap (Wbn) 827 Shares Outstanding (mn) 20 SMÊs valuation burden has significantly eased, as its shares have undergone Avg Trading Volume (60D, '000) 238 corrections due to the companyÊs rights offering and bonus issue. With the growth Avg Trading Value (60D, Wbn) 11 prospects of mobile game companies brightening amid the spread of mobile Dividend Yield (12F, %) 0.0 devices, related shares are trading at 2012F P/Es as high as 20~50x. And, since SM Free Float (%) 78.5 52-Week Low (W) 17,400 is likely to also be a key beneficiary of mobile device penetration (and the resulting 52-Week High (W) 62,000 growth of the digital content market) in 2H, we expect the companyÊs shares to Beta (12M, Daily Rate of Return) 0.6 rise. Price Return Volatility (12M Daily, %, SD) 3.9 Foreign Ownership (%) 17.7 Major Shareholder(s) Lee, Soo-man et al (21.5%) NPS (7.63%) Partners Venture Capital et al. (6.61%) Price Performance (%) 1M 6M 12M Absolute -0.1 2.6 157.6 Relative 6.8 2.8 169.5 Key Business An entertainment company that produces and sells music. § Earnings & Valuation Metrics Share price OP EV/EBITD 390 KOSDAQ FY Revenues OP NP EPS EBITDAFCF ROE P/E P/B Margin A 340 (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (x) (x) (x) 290 240 12/10 86 26 29.8 24 1,345 28 25 31.6 11.2 3.2 8.2 190 12/11 110 21 18.9 17 894 26 17 16.5 45.5 7.3 27.8 140 12/12F 188 72 38.3 62 3,105 77 43 30.6 13.0 2.8 9.1 90 12/13F 242 94 39.0 82 4,106 100 69 24.1 9.9 2.2 6.4 40 5/11 9/11 1/12 5/12 12/14F 270 106 39.2 93 4,636 111 81 21.5 8.7 1.7 5.1 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 Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. May 31, 2012 SM Entertainment I. Investment strategy Likely to benefit from the growth of the digital content market in 2H iTunes to be available in We expect SM EntertainmentÊs valuation premium to rise going forward, as: 1) the Korea in 3Q; Apple TV is companyÊs earnings improvement is likely to accelerate on the back of success in Japan, anticipated to be rolled and 2) the company should be considered a major beneficiary of the expansion of the digital out in 2H content (e.g., video footage, digital music) market. The global digital music market is likely to show significant growth. And, in 2H, we anticipate the domestic digital music distribution environment to improve. The Ministry of Culture, Sports, and Tourism (MCST) is pushing to revamp digital music pricing schemes. More specifically, the MCST is working to raise the minimum price for music downloads to W120 (from W60) and introduce a new policy that would prevent newly released songs from being included in package products for a certain period of time. We anticipate that Apple will launch iTunes in Korea in 3Q. The rollout of the service should bring convenience and high quality to Apple device users. We believe that the launch of iTunes will improve the domestic digital music distribution environment, as: 1) we forecast that Apple will offer new domestic song downloads for US$0.99, twice the price of local distributors (W600), and 2) Apple distributes 70% of its digital music revenues to copyright holders (vs. 40~50% for domestic platforms). We also expect SM to benefit from the emergence of smart TVs (e.g., Apple TV, which is slated to be rolled out in 2H). In 2011, SM generated advertising revenues of W4bn related to the companyÊs YouTube music videos. Along with the penetration of mobile devices (e.g., smartphones and tablet PCs), the emergence of Apple TV (which is likely to facilitate the distribution of high-resolution footage) should boost the consumption of music content (e.g., music videos). Meanwhile, SM is slated to expand into the drama production business in 2H by acquiring BT&I Korea (a listed company). In our view, this move appears aimed at bolstering partnerships with overseas media and entertainment peers, especially in China and Japan. In light of the companyÊs extensive global networks and strong capital power, SM should be able to make new inroads in drama production (e.g., independent production). Table 1. Global music market outlook (Wbn, %) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2011-2015 CAGR Global music market 38,852 35,827 32,001 29,457 27,192 25,650 25,237 25,119 25,288 25,668 -1.1 Digital 4,210 5,979 7,127 7,806 8,342 9,255 10,453 11,740 13,061 14,409 11.6 CD 34,643 29,848 24,874 21,651 18,850 16,395 14,784 13,379 12,227 11,259 -9.8 Percentage Digital 10.8 16.7 22.3 26.5 30.7 36.1 41.4 46.7 51.6 56.1 CD 89.2 83.3 77.7 73.5 69.3 63.9 58.6 53.3 48.4 43.9 Source: PwC, KDB Daewoo Securities Research Table 2. Domestic music market outlook (Wbn, %) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2011-2015 CAGR Domestic music market 217 235 256 353 419 487 557 626 698 770 13.0 Digital 123 159 195 300 375 450 526 600 675 751 14.9 CD 94 77 61 52 44 37 31 27 23 20 -14.9 Percentage Digital 56.7 67.7 76.2 85.0 89.5 92.4 94.4 95.8 96.7 97.5 CD 43.3 32.8 23.8 14.7 10.5 7.6 5.6 4.3 3.3 2.6 Source: PwC, KDB Daewoo Securities Research KDB Daewoo Securities Research 2 May 31, 2012 SM Entertainment Figure 1. Mobile service usage breakdown Figure 2. iPhone usersÊ mobile service usage breakdown Internet Others Game Others Internet 3% 3% Music 3% 3% 9% 2% Game E-mail 4% 8% Voice call SMS 44% Music 15% 10% Voice call E-mail 70% 12% SMS 14% Daily average usage time: 40 mins Daily average usage time: 60 mins Source: iSuppli Consumer Trak survey, KDB Daewoo Securities Research Source: iSuppli Consumer Trak survey, KDB Daewoo Securities Research Table 3. Earnings forecasts and valuations of global major music companies (2011) (local currency, %, x) Company Sales OP NP Share price ROE EPS EPSG P/E OP margin NP margin SM 109.9 20.8 16.5 40,500 16.5 893 -33.5 45.5 18.9 15.0 YG 78.1 17.3 12.9 40,500 52.0 3,322 114.7 12.2 22.2 16.5 Loen 167.2 26.6 21.4 11,300 19.7 882 128.3 12.8 15.9 12.8 Neowiz Internet 47.5 7.1 7.6 17,000 17.3 567 -16.6 30.0 14.9 15.9 KT Music 31.4 -2.3 -2.4 2,080 -11.0 -80 TTR -- -7.4 -7.6 Avex (JP) 112 11 5 1,152 17.3 124 -6.9 8.2 9.8 4.5 Amuse (JP) 26 2 1 996 10.0 123 71.1 7.4 7.7 3.8 Real Networks (US) 336 -10 -27 8.81 -7.9 -0.79 TTR -- -3.0 -8.0 Pandora (US) 138 0 -2 10.59 -- -1.03 RR -- 0.0 -1.4 Korean average 18.9 25.1 16.0 12.9 Overseas average 6.5 7.8 4.8 0.1 Global average 12.7 16.5 9.9 6.6 Note: YG is on a consolidated basis under K-IFRS; Other Korean companies are on non-consolidated basis under K-IFRS All units are in billions (Korea, Japan) and millions (others) except for per share data Source: Bloomberg, KDB Daewoo Securities Research Table 4.