[MarketING] SM Management Dispute Ignites Entertainment Stocks

KOSPI Closes Lower for Two Consecutive Days
Entertainment Stocks Stand Out Amid Sector Market

[Image source=Yonhap News]

[Asia Economy Reporter Song Hwajeong] The KOSPI closed lower for the second consecutive day due to valuation burdens and profit-taking by institutional investors. As the index showed limited movement, a stock-specific market continued, with entertainment stocks drawing attention amid a management rights dispute.

KOSPI Falls for Two Consecutive Days... SM Soars Amid Management Rights Dispute

On the 10th, the KOSPI closed at 2,469.73, down 11.79 points (0.48%) from the previous day. The KOSDAQ ended the day at 772.44, down 12.14 points (1.55%).

Institutional investors' profit-taking selling pressured the index downward. On that day, institutions sold 626.6 billion KRW in the KOSPI market. Foreign investors, who had been net sellers in the morning, turned to net buyers with 48.8 billion KRW in the KOSPI market, reducing the decline.

While the index remained sluggish due to valuation burdens and institutional profit-taking, market attention focused on entertainment stocks amid SM's management rights dispute. SM closed at 114,700 KRW, up 16.45% from the previous day. During the session, it rose to 117,000 KRW, setting a new all-time high. Its affiliates SM C&C and SM Life Design surged 29.87% and 26.32%, respectively.

HYBE's decision to acquire shares from SM's founder and chief producer Lee Soo-man led to the sharp rise in SM and its affiliates' stock prices. HYBE announced that it would acquire 14.8% of SM shares held by Lee Soo-man, the major shareholder and former chief producer, for 422.8 billion KRW. HYBE also stated it would launch a public tender offer at 120,000 KRW per share for minority shareholders of SM, matching the price paid to Lee Soo-man.

Recently, a management rights dispute at SM emerged. On the 7th, SM's board held an emergency meeting and resolved to issue new shares and convertible bonds to Kakao through a third-party allotment. Kakao secured a 9.05% stake, becoming the second-largest shareholder. In response, Lee Soo-man's side filed an injunction to prohibit the issuance of third-party new shares and convertible bonds.

On the same day, Kakao's stock fell 4.65% following HYBE's share acquisition news. HYBE's stock price rose as much as 9% early in the session but closed down 1.51% amid concerns over funding for the acquisition.

Lee Hwajeong, a researcher at NH Investment & Securities, said, "The formation of the Lee Soo-man-HYBE alliance appears to be driven by the urgent need for Lee Soo-man, the largest shareholder of SM, to secure allies in the share competition against the board-Kakao-Align alliance." She added, "HYBE has been continuously strengthening its profit base and the Weverse platform by securing high-quality K-pop intellectual property (IP)."

HYBE's acquisition of SM is considered more beneficial than detrimental. The researcher added, "Additional fundraising such as new share issuance is expected to accompany HYBE's acquisition of SM shares. Even if some dilution occurs due to new share issuance, considering SM's current performance fundamentals, HYBE can expect operating profit growth of 40-50% and earnings per share (EPS) growth of 15-25%, so the benefits outweigh the drawbacks."

The management rights dispute is likely to continue until the March shareholders' meeting. Shin Ji-in, a researcher at Shinhan Investment Corp., said, "Although it is highly likely that HYBE will take control, considering undisclosed shares and voting rights, the winner cannot yet be determined. A back-and-forth battle is expected until around the end of March shareholders' meeting."

Market Expected to Continue Stock-Specific Trends While Monitoring Economic Indicators

The stock market is expected to show limited movement while monitoring economic indicators for the time being, continuing a stock-specific market.

Han Jiyoung, a researcher at Kiwoom Securities, said, "Due to the lack of additional upward momentum, the KOSPI's upper limit is capped around the 2,500 level, and rotation among stocks continues. The market will continue to focus on individual earnings results."

While rapid rotation continues, it should be noted that the sustainability of themes may be short-lived excluding major stocks. Choi Yujun, a researcher at Shinhan Investment Corp., explained, "The stock market is focusing on stories and themes based on expectations of easing tightening rather than declining profits. As long as monetary policy does not stimulate tightening, the story-driven market can continue." He added, "However, while themes continue to spread, the sustainability of materials may decrease excluding core stocks."