A K-pop Industry Powerhouse
The author is an analyst of NH Investment & Securities. She can be reached at hzl.lee@nhqv.com. -- Ed.
We initiate coverage on SM Ent with a Buy rating and TP of W105,000. As a K-pop industry powerhouse, SM Ent has differentiated itself by leveraging its accumulated knowhow in the implementing of new business concepts (growth potential) targeting fandom and the long-term use of artist IPs (stability).
Initiate with Buy rating and TP of W105,000
We initiate coverage on SM Entertainment (SM Ent) with a Buy rating, favorably noting the firm’s long-standing powerhouse role in laying the foundation for the K-pop industry. Moving ahead, both growth and stability are to be secured via: 1) the expansion of new businesses based on accumulated knowhow; and 2) the long-term use of artist IPs. Recently, the company has rolled out a new fan membership platform utilizing its Kwangya metaverse brand. Through this effort, the firm stands to not only boost engagement among existing fandom but also elevate the success potential of any future artist groups.
Our TP of W105,000 is calculated by applying a target P/E of 35x (3yr average of 12M FWD P/Es for SM Ent, HYBE, JYP Ent, and YG Ent) to 2022E earnings.
Investment point 1: New business growth potential based on strong fandom business knowhow
Strong K-pop album sales are uniquely driven by additional factors that can activate fandom demand, such as multi-version albums and random photo cards. We note that SM Ent was the first artist management company to implement such methods. In addition, the firm has recently taken a leading position in terms of membership business by digitizing the physical membership cards issued in the past—issued to increase fan participation in events (performances, fan meetings, etc). Today, NFT-based digital stamps are issued upon participation in fan activities, and SM Ent’s membership holders become eligible for various benefits depending on the number of digital stamps they have collected.
Investment point 2: Reinforced stability thanks to lengthened lifespans of artist IPs
For SM Ent, extending the lifespans of artist IPs (its main revenue source) is essential in generating stable sales. In order to prolong the lifespans of its IPs, the company has embraced a multi-pronged strategy, including: 1) the adoption of a unit system (in place with boy group NCT); and 2) the building of a robust artist universe (Aespa). In detail, the unit system has the advantages of being able to maximize the frequency of album releases through the minimization of hiatuses, and also to limit the damage caused by the loss of members. Meanwhile, rising awareness of the firm’s unique ‘universe’ should both generate sales of universe-related content and lay the groundwork for the success of SM Ent’s next-generation groups.