Key earnings indicators to provide investors with clues Chang-kwean Kim +822-768-4321 [email protected]
Raise TP to W35,000 on success in Japan Jee-hyun Moon We maintain our Buy call on SM Entertainment and raise our target price to +822-768-3615 W35,000 (from W30,000). We revised up our 2011F and 2012F EPS by 13.9% and [email protected] 16.1%, respectively, to reflect the companyÊs greater-than-expected success in
Japan. Sales volume for GirlsÊ GenerationÊs (SNSD) first full Japanese album st (released on June 1 ) has significantly exceeded our forecast. Indeed, the album achieved double-platinum status (certified by the Recording Industry Association of Japan), which means that its sales volume reached 500,000 copies.
We raised our assumptions for the companyÊs 2011 and 2012 Japanese album sales (key variables for royalty income forecasts) to 630,000 copies (from 550,000) and to 2.19mn copies (from 2.02mn), respectively. We were conservative in our Buy (Maintain) 2011 forecast, as a portion of album sales for the year may be deferred to 2012 Target Price (12M, W) 35,000 (given that SNSDÊs album was released in June). Share Price (07/12/11, W) 26,950 We derived our target price by applying a target P/E of 11.3x (30% discount to the Expected Return (%) 29.9 average 2012F P/E of the music industry) to our 2012F EPS of W3,062 (earthquake EPS Growth (11F, %) -23.5 effects should dissipate next year, in our view). Market EPS Growth (11F, %) 22.7 P/E (11F, x) 26.3 Earnings tend to surge two quarters after successful concerts in Japan Market P/E (11F, x) 10.7 KOSDAQ 490.63 In our historical analysis of SMÊs Japanese album sales and concert performances, Market Cap (Wbn) 446 we found that the companyÊs earnings have been more affected by concerts than Shares Outstanding (mn) 17 by album sales. With regard to album sales, the profit-sharing ratio remains little Avg Trading Volume (60D, '000) 670 changed (the IFPI recommends that copyright holders collect around 15% of album Avg Trading Value (60D, Wbn) 14 sales and 20~30% of digital music sales). Meanwhile, SMÊs royalty ratio from Dividend Yield (11F, %) - Japanese concerts (paid by Japanese management firms) has surged to 70% of Free Float (%) 75.6 concert sales, from only 30% in 2009. 52-Week Low 11,850 In 1Q10, SM posted an operating profit of W10.4bn, on historic-high overseas 52-Week High 26,950 royalty income (W13bn), two quarters after TVXQ had attracted 274,000 fans to its Beta (12M, Daily Rate of Return) 0.6 Price Return Volatility (12M Daily,%,SD) 3.8 Japanese concerts (in 2Q09). The companyÊs 2Q10 operating profit reached Foreign Ownership (%) 6.9 W8.2bn, on overseas royalty income of W9.7bn, two quarters after TVXQ had lured Major Shareholder(s): 100,000 fans to its Tokyo Dome concert (in 3Q09). As of now, we forecast SMÊs SM Lee and et. Al (24.43%) Japanese concerts to attract 479,000 fans this year. KB Asset Mgmt. (10.46%) Partners Venture Capital and et. al (7.25%) Several Japanese albums to be released in 2H Price Performance TVXQ, which saw sales volume for its first single album of the year reach 284,000 (%) 1M 6M 12M copies, plans to release another single album, titled Super Star, on July 20th.And Absolute 45.7 37.5 118.2 other SM artists·GirlsÊ Generation, SHINee, Super Junior, and BoA·are also likely Relative 40.6 45.9 119.4 to release albums in Japan in 2H11.
Please read carefully important disclosures at the end of this report. July 13, 2011 SM Entertainment
Table 1. 2011 Release schedules in Korea and Japan (copies, seats) GirlsÊ Super Date BoA TVXQ SHINee f(x) Others Korea Japan Generation Junior 1/5/11 Single: Why? [Special Ver.] 230,922 1/12/11 Single: Why? [Normal Ver.] 1/25/11~1/26/11 26,000 Concert: SM Town Live (Yoyogi park) 1/26/11 284,410 Single: Why? 2/7/11 Pictorial GirlsÊ Generation DVD Preview 2/18/11~2/20/11 36,000 Concert: Super Show 3 3/16/11 55,234 Single: Why? repackage 4/20/11 58,419 ALBUM1: Pinocchio 4/27/11 159,568 Single: Mr.taxi, RDR 5/31/11~7/18/11 114,000 Concert: Arena Tour 6/1/11 500,000 Album: Girls' Generation 100,00 6/8/11 Single: Bonamana 0 6/14/11 26,616 Album: Hot Summer repackage 6/22/11 100,000 Single: Replay 6/22/11 M&D Digital Single: Close Ur Mouth 7/8/11 Cheon Sang Ji Hee Digital Single: One More Chance To be 7/20/11 Superstar released 7/22/11~8/11/11 9,441 Concert: Debut Premium Reception To be Aug~Sep/11 Super Junior - M, Mini album released 9/3/11~9/5/11 150,000 Concert: SM Town Live (Tokyo Dome) 2H11 2H11 Cheon Sang Ji Hee Album To be 2H11 Single released To be 2H11 Album released 2H11 To be released Album 2H11 24,000 Concert: Super Show 4 Note: 2H11 Schedule is provided by the company and is subject to change; Data of CDs sold after Jun 2011 is the official total quoted from RIAJ and the Japanese press (as of July 12) Source: Company data, RIAJ, Oricon Japan, Gaon Chart Korea, Daewoo Securities Research
Figure 1. CD sales trend of GirlsÊ Generation in Japan
(copies) (copies) 250,000 Album: Girls' Generation (L) 25,000 Single: Mr. Taxi/Run Devil Run (L) DVD: New Beginning Of Girls' Generation (R) 200,000 20,000
Daewoo Securities Research 2 July 13, 2011 SM Entertainment
Key earnings indicators for industry pioneers
SMÊs key earnings Investors are always skeptical of industry pioneers, as it is difficult to estimate the earnings indicator: size of of companies that have entered new industries. Initially, estimates are primarily based on Japanese concerts subjective explanations. However, we successfully identified the key earnings indicators of NHN and NCSoft, pioneers of the internet and on-line game industries, respectively. In line with the identification of these key earnings indicators, the earnings outlooks for these companies have become clearer.
For NHN, the key earnings indicator is search page views; for NCSoft, it is unique visitor trends. We found the biggest factor affecting SMÊs royalty income in Japan (which drives the companyÊs earnings growth) is the size of its Japanese concerts.
We calculated Japanese concert sales by multiplying maximum seating capacity by ticket price (assumption: the total number of tickets sold will be similar to maximum seating capacity). Although the company has a subsidiary in Japan (SM Entertainment Japan), a Japanese agency produced the concerts until 2009. However, starting this year, concerts will be co-produced by the Japanese agency and SM Entertainment Japan. SMÊs royalty ratio from Japanese concerts has surged to 70% of concert sales, from only 30% in 2009 (minus expenses including artist appearance fees, venue rental, stage production, labor costs, marketing, etc.).
Figure 2. Japanese CD sales and overseas sales trend Figure 3. Max seating capacity in Japan and overseas sales trend
('000 copies) Success of (Wbn) ('000 seats) (Wbn) 2,400 TVXQ 16 480 Girls' Generation Tour 16 CD copies sold (2Q delayed, L) Girls' Concert seat capacity (2Q delayed, L) + SM Town at Tokyo Dome, Overseas sales (R) Generation Overseas sales (R) SHINee, Super Junior + SHINee, 1,800 Super Junior 12 360 12 Success of BoA TVXQ Tour (*concert at Tokyo Dome)
Source: Koreanclick, Daewoo Securities Research Source: Koreanclick, Daewoo Securities Research
Daewoo Securities Research 3 July 13, 2011 SM Entertainment
Figure 6. Quarterly operating profit forecast and share price trend
(Wbn) (W) Earnings to grow thanks to 24 32,000 Operating profit (L) Japanese business Share price (R) (TVXQ, Girls' Generation, SHINee and Super Junior) 16 in 2011~2012 24,000 TVXQ's success in Japan in 2009: - Concerts: 374,126 seats sold - Singles: 624,913 CDs sold 8 - Albums: 317,314 CDs sold Earnings gap to 16,000 widen due to earthquake in Japan
0 8,000
2Q09 3Q09 1Q10 2Q10 3Q10 -8 274k seats 100k seats Concert size to be a key earnings indicatior 0 1Q08 1Q09 1Q10 1Q11 1Q12F
Source: Daewoo Securities Research
Figure 7. Robust sales period for Japanese CDs Figure 8. Robust sales period for Japanese concert tickets
Daewoo Securities Research 4 July 13, 2011 SM Entertainment
Table 2. CD sales volume of SMÊs major performing artists in Japan (copies) Release date BoA TVXQ GirlsÊ Generation SHINee Super Junior Title 5/30/01 40,470 ID; Peace B 7/25/01 59,450 Amazing Kiss 12/05/01 77,220 氣持ちはつたわる 1/17/02 179,590 LISTEN TO MY HEART 3/13/02 84,430 Every Heart-ミンナノキモチ 3/13/02 931,742 ALBUM1: LISTEN TO MY HEART 5/29/02 20,580 Don't start now 8/28/02 202,000 VALENTI 9/19/02 122,440 奇蹟ㆍNO.1 12/11/02 151,485 JEWEL SONG-BESIDE YOU-僕を呼ぶ声- 1/29/03 1,249,197 ALBUM2: VALENTI 5/14/03 144,264 Shine We Are! : Earthsong 10/22/03 82,395 DOUBLE 12/03/03 58,314 Rock With You 1/15/04 653,630 ALBUM3: LOVE & Honesty 2/11/04 24,292 Be the one 9/01/04 82,614 QUINCY 11/25/04 4,710 HUG 12/01/04 136,725 メリクリ 2/02/05 1,099,720 ALBUM: BEST1 3/30/05 169,542 DO THE MOTION 4/27/05 10,166 Stay With Me Tonight 7/13/05 10,496 Somebody To Love 8/31/05 54,453 make a secret 11/23/05 58,436 抱きしめる 11/02/05 16,615 My Destiny 1/18/06 74,744 Everlasting 2/15/06 427,871 ALBUM4: OUTGROW 3/08/06 11,484 明日は 來るから 3/23/06 59,055 ALBUM1: Heart, Mind and Soul 4/05/06 90,936 七色の明日∼brand new beat∼-Your Color 4/19/06 7,672 Rising Sun-Heart,Mind and Soul 6/21/06 17,283 Begin 8/09/06 40,943 KEY OF HEART-DOTCH 8/16/06 26,890 Sky 11/01/06 99,078 Winter Love 11/08/06 29,226 Miss you, O-正-反-合 1/17/07 348,093 ALBUM5: MADE IN 20 1/24/07 29,144 Step by Step 3/07/07 28,116 Choosey Lover 3/14/07 86,677 ALBUM2: Five in the Black 4/25/07 42,789 Sweet Impact 6/13/07 50,074 Lovin' you 8/01/07 124,829 SUMMER ~Summer Dream-Song for you-Love in the Ice~ 9/19/07 41,978 SHINE-Ride on 9/26/07 43,524 LOVE LETTER 11/14/07 50,781 Forever Love 12/12/07 28,128 LOSE YOUR MIND 12/19/07 39,595 Together 1/16/08 48,543 Purple Line 1/23/08 158,524 ALBUM3: T 2/06/08 27,116 Two hearts-WILD SOUL 2/13/08 32,983 Runaway 2/20/08 15,636 be with you
Daewoo Securities Research 5 July 13, 2011 SM Entertainment
Release date BoA TVXQ GirlsÊ Generation SHINee Super Junior Title 2/27/08 185,338 ALBUM6: THE FACE 2/27/08 32,939 If Rainy Night 3/05/08 21,037 Close to you 3/12/08 29,122 Keyword-Maze 4/23/08 121,771 Beautiful you-千年恋歌 6/04/08 28,916 Vivid ~Kissing you,Sparkling,Joyful Smile~ 7/16/08 120,890 どうして君を好きになってしまったんだろう? 10/15/08 91,270 呪文-MIROTIC- 1/21/09 110,717 Bolero-Kiss The Baby Sky-忘れないで 2/18/09 22,354 永遠／UNIVERSE 3/11/09 100,313 Survivor 3/18/09 132,570 ALBUM: BEST2, BEST&USA 3/25/09 317,314 ALBUM4: The Secret Code 4/22/09 180,826 Share The World-위아! 7/01/09 233,057 Stand by U 10/28/09 13,898 BUMP BUMP! 12/09/09 50,613 まもりたい ~White Wishes~ 1/27/10 289,412 BREAK OUT! 2/10/10 59,408 ALBUM7: IDENTITY 2/17/10 560,113 ALBUM: BEST SELECTION 2010 3/24/10 228,448 時ヲ止メテ 7/21/10 12,459 WOO WEEKEND 8/11/10 138,302 New Beginning of Girls' Generation 9/08/10 146,540 Single1: Genie 10/20/10 200,392 Single2: Gee 12/22/10 134,664 Hoot license 1/26/11 284,410 Why? 4/27/11 159,568 Single3: Mr.taxi, RDR 6/1/11 500,000 ALBUM1: Girls' Generation 6/8/11 100,000 Single1: Bonamana 6/22/11 100,000 Single1: Replay 7/20/11 Single Superstar Aug~Sep/11 Mini album Super Junior - M 2H11 Single 2H11 Single 2H11 Album 2H11 Album Note: Unofficial figures; Only includes CDs released and sold in Japan; 2H11 plans are provided by the company Source: Company data, RIAJ, Oricon Japan, Wikipedia Korea, Bestiz.net, All Kpop (allkpop.com), Daum Blog (music25, enhw4295-), Egloos Blog (yurui), Daewoo Securities Research
Daewoo Securities Research 6 July 13, 2011 SM Entertainment
Table 3. Concerts of SMÊs major artists in Japan (# of seats: maximum seating capacity) Date BoA TVXQ GirlsÊ Generation SHINee Super Junior Joint concert Place 3/27/03 2,700 Osaka 3/28/03 2,700 Osaka 3/30/03 3,012 Nagoya 3/31/03 3,012 Nagoya 4/05/03 13,000 Tokyo 4/06/03 13,000 Tokyo 3/20/04 37,000 Saitama 3/21/04 37,000 Saitama 3/26/04 10,000 Nagoya 3/27/04 10,000 Nagoya 4/03/04 11,000 Fukuoka 4/10/04 16,000 Osaka 4/11/04 16,000 Osaka 4/17/04 17,000 Yokohama 4/18/04 17,000 Yokohama 4/02/05 15,000 Fukuoka 4/07/05 13,000 Tokyo 4/09/05 13,000 Tokyo 4/10/05 13,000 Tokyo 4/16/05 16,000 Osaka 4/17/05 16,000 Osaka 4/23/05 10,000 Nagoya 4/24/05 10,000 Nagoya 5/13/06 500 Sapporo 5/18/06 1,500 Osaka 5/20/06 1,500 Osaka 5/21/06 1,700 Yokohama 5/22/06 1,700 Yokohama 5/23/06 800 Fukuoka 5/24/06 1,000 Nagoya 5/25/06 600 Niigata 5/26/06 700 Tokyo 5/27/06 2,700 Tokyo 5/28/06 2,700 Tokyo 9/29/06 2,000 Nagoya 9/30/06 2,000 Nagoya 10/07/06 2,000 Fukuoka 10/08/06 2,000 Fukuoka 10/13/06 2,000 Osaka 10/14/06 2,000 Osaka 10/17/06 2,000 Tokyo 10/18/06 2,000 Tokyo 10/21/06 2,000 Sendai 10/22/06 2,000 Sendai 10/28/06 2,000 Sapporo 10/29/06 2,000 Sapporo 11/05/06 2,000 Tokyo 3/31/07 17,000 Yokohama 4/01/07 17,000 Yokohama 4/07/07 15,000 Fukuoka 4/14/07 16,000 Osaka 4/15/07 16,000 Osaka 4/21/07 10,000 Nagoya 4/22/07 10,000 Nagoya
Daewoo Securities Research 7 July 13, 2011 SM Entertainment
Daewoo Securities Research 8 July 13, 2011 SM Entertainment
Date BoA TVXQ GirlsÊ Generation SHINee Super Junior Joint concert Place 5/09/09 37,000 Saitama 5/10/09 37,000 Saitama 5/16/09 7,063 Sendai 5/17/09 7,063 Sendai 5/23/09 12,000 Hokkaido 5/24/09 12,000 Hokkaido 5/30/09 15,000 Fukuoka 5/31/09 15,000 Fukuoka 6/06/09 10,000 Hiroshima 6/07/09 10,000 Hiroshima 6/10/09 16,000 Osaka 6/11/09 16,000 Osaka 6/13/09 16,000 Osaka 6/14/09 16,000 Osaka 6/18/09 10,000 Nagoya 6/20/09 10,000 Nagoya 6/21/09 10,000 Nagoya 7/04/09 50,000 Tokyo Dome 7/05/09 50,000 Tokyo Dome 12/07/10 13,000 Tokyo 1/25/11 13,000 Tokyo 1/26/11 13,000 Tokyo 2/18/11 12,000 Yokohama 2/19/11 12,000 Yokohama 2/20/11 12,000 Yokohama 5/31/11 16,000 Osaka 6/01/11 16,000 Osaka 6/04/11 37,000 Saitama 6/05/11 37,000 Saitama 6/17/11 13,000 Tokyo 6/18/11 13,000 Tokyo 6/28/11 13,000 Tokyo 6/29/11 13,000 Tokyo 7/02/11 10,000 Hiroshima 7/03/11 10,000 Hiroshima 7/06/11 10,000 Nagoya 7/07/11 10,000 Nagoya 7/17/11 11,000 Fukuoka 7/18/11 11,000 Fukuoka 7/22/11 450 Fukuoka 7/23/11 2,000 Kansai 7/27/11 2,000 Tokyo 7/28/11 2,000 Tokyo 8/08/11 700 Sapporo 8/11/11 2,291 Nagoya 9/03/11 50,000 Tokyo Dome 9/04/11 50,000 Tokyo Dome 9/05/11 50,000 Tokyo Dome 4Q11 12,000 Super Show 4 4Q11 12,000 Super Show 4 Note: Unofficial figures; Concert hallsÊ seating capacities can vary by seating plan (Osaka Hall's maximum capacity is 6,200 seats for A type, 11,200 seats for B type, and 16,000 seats for C type) Source: Wikipedia Korea, JNTO, SHINee Japanese official website (shinee.jp), Naver Blog (guduri44, forgotten_13), Egloos Blog (yurui), Daewoo Securities Research
Daewoo Securities Research 9 July 13, 2011 SM Entertainment
Daewoo Securities Research 12 July 13, 2011 SM Entertainment
Important Disclosures & Disclaimers As of the publication date, Daewoo Securities Co., Ltd and/or its affiliates do not have any special interest with the subject company and do not own 1% or more of the subject company's shares outstanding. Analyst of the subject company or member of the analyst's household does not have any financial interest in the securities of the subject company and the nature of the financial interest (including without limitation, whether it consists of any option, right, warrant, future, long or short position). This report reflects the sole opinion of the analyst without any external influences by third parties.
Buy Relative performance of 20% or greater (W) S.M. Stock Trading Buy Relative performance of 10% or greater, but with volatility 40,000 Ratings Hold Relative performance of -10% and 10% 30,000
Sell Relative performance of -10% 20,000
Overweight Fundamentals are favorable or improving 10,000 Industry Neutral Fundamentals are steady without any material changes Ratings 0 7/09 1/10 7/10 1/11 7/11 Underweight Fundamentals are unfavorable or worsening * Ratings and Target Price History (Share price (----), Target price (----), Not covered (■), Buy (▲), Trading Buy (■), Hold (●), Sell (◆)) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Daewoo Securities, we may call a trading opportunity in case there is a technical or short-term material development.
This report has been provided by the research division of Daewoo Securities Co., Ltd. The stock ratings, target prices, estimates and overall viewpoints are from the research division of Daewoo Securities. Investors can access Daewoo SecuritiesÊ research directly through our website (www.bestez.com), FirstCall Research, Reuters, FnGuide, WiseFn, FactSet and Bloomberg (DWIR). This document was prepared by Daewoo Securities Co., Ltd. („Daewoo‰). Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith. The information has not been independently verified. Daewoo makes no guarantee, representation or warranty, express or implied, is made as to the fairness, accuracy or completeness of the information and opinions contained in this document. Daewoo accepts no responsibility or liability whatsoever for any loss arising from the use of this document or its contents or otherwise arising in connection therewith. Information and opinions contained herein are subject to change without notice. This document is for information purposes only. It is not and should not be construed as an offer or solicitation of an offer to purchase or sell any securities or other financial instruments. This document may not be reproduced, further distributed or published in whole or in part for any purpose. Daewoo and/or other affiliate companies, their directors, representatives, or employees may have long or short positions in any of the securities or other financial instruments mentioned in this document or issuers described herein at any time and may purchase and/or sale, or offer to purchase and/or sale such securities or other financial instruments in the open market or otherwise, in each case either as principal or agent. This document is for distribution within the United Kingdom to persons authorized under the Financial Services Act 1986. Daewoo Securities is the sole provider of information contained in this document. DaewooÊs U.S. affiliate, Daewoo Securities (America) Inc., a member of FINRA/SIPC, is the sole distributor of this document within the U.S. This document may be distributed in the U.S. only to major U.S. institutional investors as defined in Rule 15a-6 of the U.S. Securities Exchange Act of 1934. Any U.S. recipient of this document wishing to effect any transactions in any securities discussed herein should contact and place orders with Daewoo Securities (America) Inc.
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