Daol Securities backs SM Entertainment growth in Korea, lifts target to 120,000 won

Daol Investment & Securities said on the 20th that although SM Entertainment(041510)’s third-quarter results this year will fall short of expectations, the resumption of activities for key intellectual property (IP) and a rookie debut give strong visibility for growth next year.

It raised the target price to 120,000 won from 110,000 won and maintained a Buy rating. It presented SM Entertainment as the top pick in the entertainment sector. The previous session’s closing price was 87,000 won.

Daol Investment & Securities forecast SM Entertainment’s third-quarter revenue at 284.9 billion won, down 11.4% from a year earlier, and operating profit at 33.5 billion won, down 30.5%. The operating margin is estimated at 11.8%, below the market consensus.

Concert revenue was estimated at 41.7 billion won. Aside from EXO (eight arena shows), aespa (13 arena and dome shows), and NCT 127 (three arena shows), there were no large-scale concerts, and solo tours centered on halls mainly took place. Total attendance is around 680,000.

MD and licensing revenue was projected at 54.5 billion won, down from the previous quarter due to the off-season for comebacks. However, Daol Investment & Securities said the decline will be partially offset as IP licensing revenue from collaborations such as aespa and PUBG Mobile is reflected.

Daol Investment & Securities emphasized that attention should be paid to next year’s growth potential rather than short-term earnings weakness. That is because a rookie boy group is scheduled to debut as early as year-end or by early next year at the latest, tours by Riize, NCT WISH, and Hearts2Hearts are set to expand, and there is a strong possibility of a 20th anniversary for Girls’ Generation and a 15th anniversary tour for EXO.

Researcher Lim Do-young of Daol Investment & Securities said, “SM Entertainment’s third-quarter results may be disappointing given the IP activity schedule,” but added, “Rather than short-term results, next year’s growth visibility is strong thanks to balanced contributions by IP and the resumption of major IP activities, so it is effective to focus on stocks without IP risk.”

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