[Click eStock] "SM Terminates Contract with Lee Soo-man's Personal Company... Target Price Raised"

Governance Issue 'Partially' Resolved
"Contract End Not Confirmed... Operating Profit Estimate Maintained"

Lee Soo-man / Photo by SM Entertainment

[Asia Economy Reporter Hwang Yoon-joo] Hanwha Investment & Securities on the 16th anticipated that the governance issues, which had been the biggest factor suppressing SM's stock price, would be partially resolved. Accordingly, they upgraded their investment opinion to 'Buy' and raised the target price to 103,000 KRW.

Park Soo-young, a researcher at Hanwha Investment & Securities, stated, "It is highly likely that the contract with Like Planning will be terminated this year."

Researcher Park explained, "Compared to SM's previous stance on the contract with Like Planning, which was limited to 'active consideration,' this reflects the voluntary intention of producer Lee Soo-man."

In a previous report, Hanwha Investment & Securities had estimated SM's operating profit for 2023 at 112.6 billion KRW. From 2015, when the contract terms were changed once, through 2021, SM paid a total of 98.3 billion KRW in fees to Like Planning over seven years.

Researcher Park analyzed, "Upon termination of the royalty payment contract with Like Planning starting in 2022, the additional profit that could be added to the existing 2023 operating profit estimate would be 29.7 billion KRW (5.3% of SME's separate sales). If the contract termination is confirmed, the 2023 operating profit estimate can be raised to 142.3 billion KRW."

The multiple assigned by Hanwha Investment & Securities to SM was 24 times the controlling shareholder's net income. This reflected a 20% discount compared to the industry standard multiple (30 times), considering governance noise and low visibility on new IP additions.

Researcher Park pointed out, "With this disclosure, the 'governance noise' discount factor can be partially resolved, so the multiple is adjusted upward to 27 times. However, since the contract termination is not yet confirmed, there is no change to the estimates."

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