SM Entertainment
SM Entertainment (041510 KQ ) Overall trajectory remains clear Entertainment Lower TP on earnings revisions , b ut overall trajectory remains clear We maintain our Buy call on SM Entertainment, but lower our target price to W47,000. While the expected rate of earnings improvement in 2018 needs to be adjusted Company Report downwards , we remain bullish on the company’s new idol lineup (NCT China to debut April 25, 2018 this summer) an d increasing content production competitiveness (production of hit dramas). Recently, worries over the earnings impact of accounting changes and allegations of improper outsourcing of record producing services have dampened investor sentiment. However, we note that the former merely relates to the timing of revenue (Maintain) Buy recognition and is therefore unrelated to fundamentals, while the latter is an already well-known issue. We believe SM Entertainment’s investment case - the cultivation of Target Price (12M, W) ▼ 47,000 new growth engines (ne w idol groups, content production, and resumption of China concerts) amid strong earnings growth of existing businesses (and advertising) - remains intact, al though the rate of earnings growth may need to be adjusted. Share Price (04/24/18, W) 36,550 Earnings estimates revised downwards, due to SM Japan accounting changes Expected Return 29% For 1Q18, we forecast consolidated revenue and operating profit to come in at W149bn (+119% YoY; all growth figures hereafter are YoY) and W13.2bn (+998%), respectively. We revised our estimates downwards, mainly due to accounting changes related to SM Japan (from IASB18 to IFRS15). The biggest impact on earnings will likely OP (18F, Wbn) 60 come from the company recognizing the 520,000 attendees of TVXQ’s 4Q17 dome tour Consensus OP (18F, Wbn) 56 in 4Q17 (accrual basis), rather than in 1Q18, as we had previously assumed.
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