[Click eStock] "SM, Prolonged COVID-19... Earnings Estimates Downgraded Until Next Year"

[Asia Economy Reporter Park Jihwan] KB Securities has downgraded the earnings estimates for SM Entertainment for this year and next year due to the prolonged COVID-19 pandemic, while maintaining a 'Buy' investment rating. However, the target stock price was lowered by 9.5% from the previous 42,000 KRW to 38,000 KRW.

Researcher Lee Seonhwa of KB Securities stated, "As COVID-19 prolongs, the recovery period for overseas subsidiaries' sales has been delayed, and the debut schedules of rookie groups have also

been postponed more than expected, leading to a downward revision of earnings estimates for this year and next year."

SM's consolidated sales for the fourth quarter were 184.2 billion KRW, and operating profit was 1.3 billion KRW, down 5% and 90.2% respectively compared to the previous year. The operating profit fell short of the consensus (market expectations) by 6 billion KRW.

While sales in the separate segment exceeded expectations due to the release of NCT's full-group second studio album and SuperM's studio album, the analysis points to increased cost burdens caused by a one-time expense of 2.8 billion KRW in non-deductible VAT input tax due to a tax audit, and sluggish sales from consolidated subsidiaries due to COVID-19.

Researcher Lee explained, "Despite COVID-19, SM's separate segment sales only decreased by 1.2% year-on-year thanks to album releases from major artists such as NCT and SuperM," adding, "However, SM Japan's sales dropped by 53.2% due to the absence of activities in Japan, and the concert production company Dream Maker's sales decreased by 66.1%."

It is analyzed that, with the COVID-19 situation expected to continue in the first half of this year, it is necessary to confirm the sales recovery of major subsidiaries. NCT, SM's flagship artist, performs as a full group every two years, and since NCT released a full-group studio album last year, there is no full-group studio album expected this year. An artist to replace NCT is needed, but EXO is unable to perform as a full group due to military enlistment.

The researcher emphasized, "Although a rookie boy group debut is being prepared, the debut schedule is being delayed due to COVID-19," and added, "It is necessary to strengthen the artist pipeline to fill the gaps left by EXO and NCT."