January 4, 2012 Company Report SM Entertainment (041510 KQ) Entertainment Daewoo Securities Co., Ltd. Japanese concert ticket sales to reach 500,000 in 1H12 Chang-kwean Kim +822-768-4321 Raise TP to W70,000; Maintain Buy call [email protected] We maintain our Buy call on SM Entertainment and raise our target price to W70,000 Jee-hyun Moon (from W57,000). As the companyÊs 4Q11 results are forecast to exceed our previous +822-768-3615 projections, we adjusted up our 2011 and 2012 EPS estimates by 4.6% and 3.3%, [email protected] respectively. Also, we are in the process of getting a clearer picture of the companyÊs 2012 earnings variables (e.g., concert schedules are being firmed up). We arrived at our target price by applying a P/E of 19.12x (a 20% discount to the domestic music industryÊs average 2012F P/E of 23.9x) to our 2012F EPS. Japanese concert ticket sales likely to double YoY in 2012 to 1.2mn tickets We estimate that SM EntertainmentÊs artists drew 588,000 fans to Japanese Buy (Maintain) concerts in 2011 (based on maximum capacity figures), vs. 374,000 fans in 2009 and Target Price (12M, W) 70,000 13,000 fans in 2010. The company is believed to have sold 2.53mn CDs in 2011 in Share Price (01/03/12, W) 47,500 Japan, vs. 1.16mn copies in 2009 and 1.76mn copies in 2010. We assume that Expected Return (%) 47.4 100,000 concert ticket sales lead to W6~7bn in royalty income, while 100,000 CD EPS Growth (11F, %) -10.8 sales result in W700~800mn in royalty income. Market EPS Growth (11F, %) -0.1 P/E (11F, x) 39.7 In 2012, SMÊs artists are forecast to lure more than 1.2mn fans to their Japanese Market P/E (11F, x) 10.4 concerts. TVXQ and SHINee are scheduled to hold concerts (capacity of 479,000 KOSDAQ 513.83 fans) in Japan in 1H. And GirlsÊ Generation is slated to focus on its Japanese activities Market Cap (Wbn) 787 this year. Furthermore, another girl group, f(x), plans to make its Japanese debut in Shares Outstanding (mn) 17 2012. Japanese concert ticket sales are likely to reach 500,000 in 1H12 alone. Avg Trading Volume (60D, '000) 876 Avg Trading Value (60D, Wbn) 44 Earnings momentum to stay strong through 1Q12 Dividend Yield (11F, %) 0.0 Free Float (%) 75.6 In 4Q11, SM is forecast to post revenues of W31.6bn (up 74.1% YoY) and an 52-Week Low (W) 15,650 operating profit of W11.3bn (up 394.0% YoY). The companyÊs 4Q results should 52-Week High (W) 62,000 reflect sales of GirlsÊ GenerationÊs first regular Japanese album (released in June) and Beta (12M, Daily Rate of Return) 0.7 its global album The Boys (released in 4Q). Price Return Volatility (12M Daily, %, SD) 4.1 Foreign Ownership (%) 8.0 Royalty income from Japanese concerts, including the September SM Town concert Major Shareholder(s) at the Tokyo Dome, is forecast to be recognized starting in 1Q12. The companyÊs SM Lee et al. (24.39%) 2012 revenues and operating profit are projected to climb to W166.9bn and Partners Venture Capital et al. (7.24%) W70.3bn, respectively. In projecting the companyÊs 2012 earnings, we conservatively NPS (6.24%) assumed that the companyÊs Japanese CD sales would reach 2.51mn copies in 2012 Price Performance (the 2011 level). Royalty income from Japan is recognized two to three quarters after (%) 1M 6M 12M sales are generated. Absolute 5.1 101.7 165.4 Relative 7.2 113.5 174.8 Share price § Earnings & Valuation Metrics 440 KOSDAQ FY Revenues OP OP Margin NP EPS EBITDAFCF ROE P/E P/B EV/EBITDA 390 (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (x) (x) (x) 340 12/09 62 9 15.0 5 278 12 10 7.3 16.2 1.2 3.5 290 240 12/10 86 26 29.5 22 1,342 28 26 29.1 12.6 3.3 8.1 190 12/11F 102 23 22.6 20 1,197 28 15 20.0 38.2 7.1 24.8 140 12/12F 167 70 42.1 61 3,683 74 49 42.8 12.9 4.7 9.1 90 12/13F 186 83 44.7 74 4,462 86 65 35.3 10.7 3.3 7.0 40 12/10 4/11 8/11 12/11 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. January 4, 2012 SM Entertainment Table 1. Annual earnings forecasts (Wbn, %) 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F Revenues 21 29 31 40 62 86 102 167 186 CD 8 9 9 11 15 15 16 17 18 Digital music 2 4 4 5 10 9 9 10 15 Overseas 6 5 6 9 16 37 41 107 118 CD 0 0 1 1 1 1 2 3 3 Royalty 6 5 5 8 15 36 44 105 115 Management 5 12 12 16 22 26 37 33 35 Revenue breakdown CD 36.2 29.9 28.4 26.9 23.7 17.3 15.6 10.1 9.5 Digital music 9.0 13.7 14.0 11.9 15.3 9.8 8.6 5.9 8.1 Overseas 28.8 16.5 18.0 21.4 25.5 42.6 40.0 64.2 63.7 Management 26.0 39.9 39.6 39.8 35.5 30.3 35.8 19.8 18.7 Albums sold (Â000) 101 118 120 128 174 178 190 200 210 ASP (W) 7,400 7,400 7,400 8,400 8,400 8,400 8,400 8,400 8,400 Digital/CD sales 24.9 45.7 49.4 44.3 64.8 57.0 55.4 59.0 85.4 Management/CD sales 71.8 133.5 139.7 148.0 149.7 175.4 197.7 196.6 197.1 COGS 16 25 29 36 42 49 62 77 81 Gross profit 7 5 4 8 20 38 41 90 104 Gross profit margin 29.4 15.1 12.5 17.5 32.3 43.6 39.8 54.0 56.2 Operating profit 1 -2 -4 -2 9 26 23 70 83 OP margin 5.6 -7.7 -11.2 -3.9 15.0 26.2 22.6 42.1 44.7 Pretax profit 1 -3 -7 5 6 23 26 77 92 Pretax margin 5.2 -9.6 -21.4 10.4 9.9 26.2 25.1 46.0 49.5 Net profit 1 -4 -8 4 5 22 20 61 74 Net margin 5.4 -13.5 -23.0 9.8 7.2 25.2 19.3 36.4 39.6 YoY growth Revenues 41.6 7.1 27.9 54.1 39.9 18.3 63.3 11.2 CD 17.0 1.6 21.3 35.7 2.1 6.9 5.3 5.0 Digital music 115.1 9.7 8.9 98.1 -10.2 3.9 12.2 51.8 Overseas -19.0 17.0 52.0 84.1 133.1 11.1 162.4 10.2 Management 117.5 6.3 28.4 37.3 19.6 39.6 -9.7 5.3 Operating profit TTR RR RR TTB 174.9 -9.5 205.0 18.1 Net profit TTR RR TTB 4.5 387.7 -9.5 207.8 21.1 Note: On a non-consolidated basis under K-IFRS since 2011 Source: Company data, KDB Daewoo Securities Research Table 2. 2011~2012 Earnings forecast revisions (Wbn, W, %) Previous Revised % Diff. 2011F 2012F 2011F 2012F 2011F 2012F Revenues 92 166 102 167 11.2 0.3 Operating profit 21 69 23 70 9.8 2.1 Net profit 19 59 20 61 4.4 3.3 EPS 1,145 3,566 1,197 3,683 4.6 3.3 OP margin 22.8 41.4 22.6 42.1 Net margin 20.5 35.3 19.3 36.4 Note: On a non-consolidated basis under K-IFRS Source: KDB Daewoo Securities Research KDB Daewoo Securities Research 2 January 4, 2012 SM Entertainment Table 3. Overseas sales assumptions (%, Wbn, Â000 copies) 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F Market share in Japan 0.4 0.3 0.4 0.5 1.1 3.3 3.5 8.7 9.8 Royalties from Japan 4 3 4 5 10 28 36 96 106 Revnues from Japan 18 15 17 26 49 142 144 322 355 Revenues from other 2 2 2 3 6 9 10 11 12 countries # of CDs sold in Japan TVXQ (5) 300 940 - - - GirlsÊ Generation - - 700 940 940 SHINee - - - 310 470 Super Junior - - - 310 470 TVXQ (2) - - 300 940 940 Total 300 940 1,000 2,510 2,820 Source: KDB Daewoo Securities Research Table 4. Annual trends of CD and concert ticket sales in Japan (copies, seats) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012F CD 177,140 1,692,267 1,534,170 901,971 1,408,932 885,182 913,728 914,085 1,161,662 1,769,738 2,533,699 - Concert - - 37,424 171,000 106,000 41,400 159,520 337,039 374,126 13,000 588,441 479,000 Note: Concert sales are based on the maximum seating capacity of the venues; 2012F Concert sales reflect the performances until July 1st; Above figures are unofficial; Source: KDB Daewoo Securities Research Figure 1.