[Click eStock] "SM, Management Efficiency of Subsidiaries is Key"

Korea Investment & Securities "Target Price Lowered from 44,000 KRW to 40,000 KRW"
Last Year's Other Subsidiaries Operating Loss of 16 Billion KRW... Artist's Return Seen as Positive Factor

Lee Soo-man / Photo by SM Entertainment

[Asia Economy Reporter Gong Byung-sun] As the resumption of offline performances is delayed, there are calls for efficiency improvements in SM’s subsidiaries. Korea Investment & Securities has lowered the target price for SM from the previous 44,000 KRW to 40,000 KRW, while maintaining a ‘Buy’ rating.

Park Ha-kyung, a researcher at Korea Investment & Securities, stated that the resumption of SM’s offline performances was initially assumed to be in the second half of the year but has now been postponed to the fourth quarter. Accordingly, the expansion of losses in subsidiaries with a large share of performances, such as SMJ and Dream Maker, is inevitable. Park said, “However, the speed of profit rebound in subsidiaries will be fast once performances resume,” adding, “Especially in Japan, where the performance market is large and the most concerts have been held, recovery is expected based on strong demand.” In 2019, SM held 72 performances in the Japanese market.

Last year, the operating loss of other subsidiaries was 16 billion KRW. Since the results fell short of market expectations (consensus), Korea Investment & Securities explained that restructuring of underperforming subsidiaries is essential for stock price growth. Last year, SM restructured the underperforming food and beverage business among other subsidiaries, and the DearU corporation is expected to turn a profit this year. On the 5th, SM also attempted to reorganize its affiliate structure to improve business efficiency.

The comeback of artists is a positive factor. Following the first quarter, several artists including EXO and NCT are scheduled to return to the stage in the second quarter. Park said, “While the entertainment core business continues to perform well, the drama lineup will strengthen and performances will resume as we move into the second half of the year,” adding, “With the arrival of the advertising peak season, the subsidiaries’ losses are expected to decrease.”

First-quarter earnings are expected to meet consensus. SM’s first-quarter sales recorded 131 billion KRW, down 10% year-on-year, while operating profit rose 95% to 3.3 billion KRW. Thanks to strong album sales, SME’s standalone sales are expected to increase 21% year-on-year to 82.9 billion KRW. First-quarter album sales reached 1.3 million copies, a significant increase from 270,000 copies in the same period last year. However, subsidiary losses continued into the first quarter this year. SM C&C recorded an operating loss of 3 billion KRW due to the advertising off-season. KeyEast also aired only one drama, ‘Hush.’

This content was produced with the assistance of AI translation services.