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.