SK Securities on the 18th said earnings for SM Entertainment will improve on streamlined operating structures and expanded artist activities. The firm initiated coverage with a "buy" rating and a target price of 134,000 won. The previous trading day's closing price for SM Entertainment was 99,500 won.
Park Jun-hyung, an analyst at SK Securities, said earnings are expected to improve through SM Entertainment's "SM NEXT 3.0" strategy unveiled this year.
Park said, "SM Entertainment is in a phase of overhauling its production and operating structure by breaking away from the founder-centered producing system and introducing a multi-production system, increasing artist activities and expanding content production."
Cost savings through expansion of the intellectual property (IP)-centered business are also expected. Park said, "We are discussing local IP production in collaboration with key partners in Thailand, Japan and China," adding, "SM Entertainment's influence in Western markets is relatively lower than rivals, but the company is opting for gradual expansion centered on existing IP rather than aggressive investment."
Park said content production expenses will be reduced by using AI. Park said, "The company will prioritize applying AI to artist scouting and planning (A&R) and content production efficiency rather than developing virtual artists, cutting costs in music archiving and music video production," adding, "This is highly likely to lead to reduced outsourcing expenses and margin improvement."
The debut of a new group and expanded performances by existing groups were also presented as growth drivers. Park said, "A new boy group is scheduled to debut in the second half," adding, "Through expanded U.S. activities and larger-scale performances by aespa, RIIZE and NCT 127, performance and merchandise (MD) sales are expected to increase."
If expectations for an easing of the ban on the Korean wave grow, SM Entertainment's stock price could rise. Park said, "SM Entertainment is more sensitive than peers to share price moves on expectations of an easing of the ban on the Korean wave," adding, "The company owns older IP with high recognition in China, and through its partnership with Tencent Music (TME) and its subsidiary DearU's tie-up with QQ Music to launch the fan communication platform Bubble in China, earnings are expected to improve if the ban is lifted."