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SM Entertainment SM Entertainment (041510 KQ ) Plenty of momentum ahead Entertainment Raise TP to W50,000 on 2018 profit growth Results Comment We maintain our Buy call on SM Entertainment and raise our target price by 13.6% to W50,000. SM Entertainment is displaying robust earnings on the back of its fully active March 12, 2018 lineup, while its expansion into new business areas (content production and advertising agency) and global idol project, NCT, are progressing smoothly. We also believe SM Entertainment will benefit greatly from the resumption of concert/production projects in China, given the strong potential for concerts by (Maintain) Buy popular artists, as well as the company’s well-establishe d business structure (the company has two local subsidiaries) and content production capabilities (strong talent Target Price (12M, W) ▲ 50,000 pool for entertainment shows/dramas). 4Q17 review: Strong results, excluding one-offs Share Price (03/09/18, W) 38,250 For 4Q17, SM Entertainment reported consolidated rev enue of W155bn (+97.7% YoY) and operating profit of W3.7bn (+495.9% YoY). Revenue was ahead of consensus Expected Return 31% (W110.8bn), but operating profit missed (consensus of W9.2bn). Revenue was boosted by: 1) SM C&C’s stronger-than-expected advertising revenue (W37.7bn; OP margin of 9%); 2) better-than-expected Japanese concert royalties (around 800,000 attendees); OP (17P, Wbn) 11 and 3) robust domestic album sales (EXO and Super Junior in February). Consensus OP (17F, Wbn) 17 At the operating level, however, the company was hit by a number of non-recurring EPS Growth (17P, %) - item s, including bonus payouts, SM C&C’s merger compensation (W7bn), and the Market EPS Growth (17F, %) 45.2 expensing of content (the drama Jealousy Incarnate , which was previously capitalized; W3bn at SM C&C), due to delays in sales to China. The content expensing was P/E (17P, x) - somewhat anticipated, as similar cases were observed in the previous quarter (with Market P/E (17F, x) 10.3 regard to dramas Missing 9 and Jo Deul-ho ). However, we note the company has no KOSDAQ 865.80 more content assets to be expensed and will recognize profits once Korea-China relations improve and content sales resume. Market Cap (Wbn) 832 Shares Outstanding (mn) 22 Earnings growth to gather momentum in 2018-19 Free Float (%) 79.4 Our 2018 outlook for strong profit growth remains unchanged: Foreign Ownership (%) 19.0 Beta (12M) 0.63 1) We expect subsidiary SM C&C to generate operating profit of over W10bn. In the 52-Week Low 22,350 latest earnings results, SM C&C’s ad business exhibited solid revenue and higher-than- expected margins (OP margin of 9%). Meanwhile, SM C&C’s production bus iness is also 52-Week High 39,950 set to gain traction, with three/four dramas (versus one in 2017) and 35 variety shows (%) 1M 6M 12M (versus 30 in 2017) slated for this year. Absolute 3.7 27.9 64.9 2) Concert income and visibility should improve. The company has finally changed its Relative 0.9 -3.3 15.4 revenue recognition method for Japanese concerts to an accrual basis, which should temporarily boost income for some 2018 concerts. Meanwhile, we are gaining 180 SM Entertainment KOSDAQ increasing visibility on major artists’ concerts. As such, we raised our estimates for 160 TVXQ and lowered our estimates for Su per Junior. Overall, we expect the strongest 140 concert attendance on record (2.3mn) this year. 120 3) We also see additional growth materializing from 2019, driven by content production for 100 the web and TV networks—an area where there is considerable potential f or synergy with core businesses. The company has a strong talent pool, and cost savings could be achieved 80 2.17 6.17 10.17 2.18 with the ad business in the long term. In particular, on ce the situation with China returns to normal, we think the content production business will i nitially make more progress than the concert business, in terms of both the pace of project execution and profit potential. Mirae Asset Daewoo Co., Ltd. [ Media ] FY (12) 12/14 12/15 12/16 12/17P 12/18F 12/19F Revenue (Wbn) 287 322 350 377 584 581 Jeong -yeob Park +822 -3774 -1652 OP (Wbn) 34 38 21 11 68 68 [email protected] OP margin (%) 11.8 11.8 6.0 2.9 11.6 11.7 NP (Wbn) 6 22 4 -9 36 34 EPS (W) 290 1,048 169 -392 1,659 1,573 ROE (%) 2.5 8.3 1.2 -2.6 10.7 9.2 P/E (x) 117.1 41.0 153.0 - 23.0 24.3 P/B (x) 2.9 3.1 1.7 2.3 2.3 2.1 Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 0.0 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates March 12, 2018 SM Entertainment Earnings forecasts and valuation Table 1. Target price calculation (Wbn, x, W, %) Valuation - P/E 18F 19F Fair market cap (a) 1,083 1,027 Controlling interests 36 34 Target P/E 30.0 30.0 Target price (W) 49,784 47,191 Upside potential (%) 30.2 23.4 Source: Mirae Asset Daewoo Research estimates Table 2. Quarterly and annual earnings (Wbn, %, mn, %p) 1Q17 2Q17 3Q17 4Q17P 1Q18F 2Q18F 3Q18F 4Q18F 2016 2017P 2018F Revenue 68 68 87 155 174 121 133 156 350 378 584 SM Ent. 41 40 61 75 71 54 63 70 202 216 258 SM Japan 13 12 12 22 40 17 22 22 51 59 102 Dream Maker 6 16 8 13 16 10 13 15 51 43 53 SM C&C 15 11 10 52 56 46 41 56 90 89 199 Consolidation adj./other -6 -12 -4 -6 -9 -6 -6 -7 -44 -29 -28 Operating profit 1.2 1.4 4.6 3.7 24.4 12.2 20.1 11.4 21 11 68 OP margin (%) 1.8 2.0 5.3 2.4 14.0 10.1 15.2 7.3 5.9 2.9 11.7 Pretax profit -3.3 1.9 32.2 -6.4 22.9 12.9 19.0 6.6 23 24 61 Net profit -8.0 3.8 12.8 -13.3 15.6 8.8 12.9 4.5 4 -5 42 Net margin (%) -11.8 5.6 14.8 -8.6 9.0 7.2 9.7 2.9 1.2 -1.2 7.2 Net profit attributable to -6.8 4.2 17.6 -23.5 13.0 7.5 12.1 3.5 3.6 -8.5 36.1 controlling interests YoY Revenue -24.7 -12.0 -16.8 97.7 155.9 79.1 53.2 0.4 8.6 7.9 54.7 SM Ent. -16.4 -4.7 -0.7 48.6 75.1 33.8 4.5 -6.5 2.4 7.0 19.4 SM Japan -36.8 111.1 -7.6 89.3 206.1 43.1 89.3 2.2 -33.0 16.2 73.1 Dream Maker -76.1 194.4 -54.0 202.8 186.9 -38.6 52.5 14.3 -3.4 -16.7 24.7 SM C&C -27.5 -55.4 -57.6 154.8 279.8 306.0 303.7 7.8 19.8 -1.6 125.0 Operating profit -86.7 TTB -65.7 495.9 1,935.2 786.6 335.4 208.9 -46.1 -47.4 525.6 Net profit TTR TTB 49.2 RR TTB 131.0 0.7 TTB -50.4 -51.2 304.5 Key assumptions Concert ticket sales in Japan 0.2 0.2 0.4 0.7 0.6 0.3 0.5 0.5 1.3 1.5 1.8 Notes: Based on consolidated K-IFRS; concert ticket sales are based on the actual date of each concert and include our estimates Source: Company data, Mirae Asset Daewoo Research estimates Table 3. Earnings forecast revisions (Wbn, W, %, %p) Previous Revised Change Notes 17F 18F 17P 18F 17P 18F Revised earnings estimates and changed recognition method for Revenue 355 556 378 584 6.3 4.9 Japanese concerts (accrual basis) Operating profit 17 57 11 68 -36.1 19.2 Net profit 19 34 -9 36 -145.6 7.1 Revised effective tax rate upwards OP margin 4.8 10.3 2.9 11.7 -1.9 1.4 Net margin 5.3 6.1 -2.3 6.2 -7.5 0.1 Notes: Based on consolidated K-IFRS; net profit is attributable to controlling interests Source: Mirae Asset Daewoo Research estimates Mirae Asset Daewoo Research 2 March 12, 2018 SM Entertainment Figure 1. Annual concert attendees in Japan by major artist/group (mn persons) 2.0 SM TOWN 1.8 EXO f(x) 1.6 Super Junior 1.4 SHINee 1.2 Girls' Generation 1.0 TVXQ BoA 0.8 0.6 0.4 0.2 0.0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017F 2018F Note: Concert attendees are estimates based on venue size Source: Mirae Asset Daewoo Research Figure 2. SM Entertainment stands to be biggest beneficiary once Chinese operations resume Source: Mirae Asset Daewoo Research Figure 3. SM C&C’s contribution to consolidated revenue to surge (Wbn) 700 SM C&C DREAM MAKER 600 SM JAPAN 500 SME 400 300 200 100 0 2015 2016 2017F 2018F Source: Mirae Asset Daewoo Research Mirae Asset Daewoo Research 3 March 12, 2018 SM Entertainment SM Entertainment (041510 KQ/Buy/TP: W50,000) Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/16 12/17P 12/18F 12/19F (Wbn) 12/16 12/17P 12/18F 12/19F Revenue 350 377 584 581 Current Assets 293 304 366 426 Cost of Sales 248 265 375 375 Cash and Cash Equivalents 170 60 121 160 Gross Profit 102 112 209 206 AR & Other Receivables 44 87 87 94 SG&A Expenses 82 102 141 138 Inventories 11 22 22 24 Operating Profit (Adj) 21 11 68 68 Other Current Assets 68 135 136 148 Operating Profit 21 11 68 68 Non-Current Assets 232 305 286 281 Non-Operating Profit 2 13 -7 -9 Investments in Associates 39 77 77 84 Net Financial Income -1 1 0 0 Property, Plant and Equipment 104 91 80 70 Net Gain from Inv in Associates 4 25 0 0 Intangible Assets 37 47 38 31 Pretax Profit 23 24 61 59 Total Assets 525 609 652 707 Income Tax 17 29 20 19 Current Liabilities 135 225 225 240 Profit from Continuing Operations 6 -5 42 40 AP & Other Payables 43 84 85 92 Profit from Discontinued Operations -2 0 0 0 Short-Term Financial Liabilities 46 50 50 50 Net Profit 4 -5 42 40 Other Current Liabilities 46 91 90 98 Controlling Interests 4 -9 36 34 Non-Current Liabilities 15 14 14 15 Non-Controlling Interests 1 4 6 6 Long-Term Financial Liabilities 11 6 6 6 Total Comprehensive Profit 5 -5 42 40 Other Non-Current Liabilities 4 8 8 9 Controlling Interests 4 -3 57 54 Total Liabilities 150 239 240 255 Non-Controlling Interests 1 -2 -15 -14 Controlling Interests 330 319 355 389 EBITDA 44 33 88 84 Capital Stock 11 11 11 11 FCF (Free Cash Flow) 7 -31 61 54 Capital Surplus 165 170 170 170 EBITDA Margin (%) 12.6 8.8 15.1 14.5 Retained Earnings 131 123 159 193 Operating Profit Margin (%) 6.0 2.9 11.6
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