Bubble may be popping for entertainment stocks

With SM Entertainment’s operating profit for the latest quarter hitting a lower-than-expected 11.7 billion won ($10.8 million), investors have begun off-loading their entertainment stocks en-masse out of fear that the boom propped up by idol groups and the global success of Psy’s hit song “Gangnam Style” may be over.

SM Entertainment, the incubator of K-pop boy band TVXQ and girl group Girl’s Generation, shocked institutional investors last week by releasing its disappointing earnings.

Although the company’s sales of 51.5 billion won more or less kept pace with analyst expectations, the operating profit was about half the estimated 21.7 billion won.

After seeing the company’s stock price soar from less than 5,000 won in early 2010 to nearly 70,000 won, panicked investors started selling to beat the predicted rush.

The company, which was hoping to soon join the top four big caps on the Kosdaq, witnessed more than a 40 percent cut in its stock price as it was pushed out of the top 10 in terms of market cap. Investors dumped more than 110 billion won of the stock within three days of the earnings report.

SM Entertainment saw operating profit jump from 20 percent last year to 30 percent in the first half of 2012, and analysts were hoping to see it climb to 42.7 percent in the last quarter. Most listed companies on the Korean bourse see operating profits of 5 percent.

Now institutional investors are also taking flak for their overly positive forecasts.

Daewoo Securities said in its report that SM would “leap to become a major entertainment company in Asia in 2013.” Korea Investment and Securities said it “will create a lasting fan base.”

Analysts say projections like this evolved because the company released too little data, making it impossible to set more accurate forecasts.

“If the company continues not to share its expenses, earning forecasts will remain hazy,” said one local analyst.

In its defense, SM said it cannot project its earnings precisely because the industry is hard to predict.

“We provide industry analysts with all the material we can, including the performance schedules of our overseas entertainers and statistics on how many albums were sold,” said Seo Jang-won, who is in charge of investor relations at SM. “Unlike manufacturing companies, we don’t give out guidance reports on projected earnings.”

Seo said the drop in operating profit is just a temporary slip. “This was because we spent a lot to help TVXQ make a strong comeback,” said Seo. “When you take a look at the company’s [increasing] sales, it’s easy to see there is no problem with its business [strategies].”

Four out of six security companies raised their targeted stock price this month and then dropped it after the earnings report came out. One cut it’s target price by over 20 percent.

“A kind of bubble was created as companies that do not usually analyze the industry jumped in and helped raise expectations,” said Choi Wung-pil, analyst at KB Investment and Securities.

Choi said confidence in the company remains high.

“I don’t think institutional investors are selling because they question the value of the company,” he said. “It’s not that overall confidence in entertainment stocks is waning. Rather [we are looking at] the bubble being removed.”

He said other entertainment stock prices may edge down in the process of stabilizing.

By Ko Ran [summerlee@joongang.co.kr]