Synergy from Collaboration with Kakao Visible?…SM Up 10.8% Since April

End of Management Dispute... Expectation of Performance Growth
Q1 Operating Profit Falls Short of Expectations

SM Entertainment (SM) stock has shown signs of a rebound since April. With the conclusion of the management dispute, attention is focused on medium- to long-term growth expectations. Except for the first quarter of this year, annual performance improvement is anticipated.

According to the Korea Exchange on the 25th, SM's stock price rose 10.8% from 94,400 KRW to 104,600 KRW between the beginning of this month and the 24th.

During the management dispute, SM's stock price peaked at 158,500 KRW (March 8) when HYBE and Kakao each proposed a public tender offer. Less than a week later, news of an agreement between HYBE and Kakao caused the stock price to fall to 91,100 KRW (March 27).

The gradual rise in stock price since April is attributed to institutional buying. Institutions alone net purchased 39.2 billion KRW worth of shares. Foreigners and individuals net sold 29.7 billion KRW and 13.5 billion KRW, respectively.

The reason institutions are buying SM shares is due to expectations of annual performance improvement starting this year. It is analyzed that the stock’s attractiveness has increased significantly in three main aspects: profitability improvement, external growth, and collaboration with Kakao. NH Investment & Securities and Meritz Securities have raised their target prices for SM to 130,000 KRW and 135,000 KRW, respectively.

With the end of the management dispute, structural cost reduction effects are expected. Researcher Lee Hwajeong of NH Investment & Securities explained, "The complete termination of the producing contract with Like Planning will eliminate commission expenses of about 30 billion KRW annually (up to 6% of separate sales)."

The introduction of a multi-production center is expected to aid external growth. This is because the cycle of new album releases will shorten and the frequency of rookie debuts is expected to increase. Researcher Jung Jisoo of Meritz Securities said, "In the second half of this year, one male and one female rookie group are preparing to debut, and with the addition of an AI artist’s single album, the lineup is expected to become richer."

Collaboration with Kakao is expected to significantly help short-term performance improvement. Benefits are anticipated from acting as the world tour agent for Kakao-affiliated artists such as IVE and The Boyz.

However, first-quarter performance is expected to fall short of estimates due to one-time costs related to the management dispute. Operating profit for the first quarter is expected to be around 20.6 to 20.9 billion KRW, representing a 7.2% to 9.0% increase compared to the previous year. Researcher Jung Jisoo pointed out, "Legal advisory costs of about 4 to 5 billion KRW are reflected, causing a slight decline in profit margin."