[kpop/finance] examining the P/E ratio of S.M. Entertainment Co, YG Entertainment Inc, and JYP Entertainment Corp

As an ilam resolution for 2013, I decided to learn more about the finances of some of the largest Korean entertainment agencies, (listed in order of size) S.M., YG, and JYP, which are all publicly listed on the KOSDAQ. For this post, let us look at the P/E ratios of these companies.

yes, let's get to it! P/E ratios for everyone!

yes, let’s get to it! P/E ratios for everyone!

Just a bit of terminology before we delve into the fun stuff:

  • a dividend is money paid out to stockholders from a company’s earnings. From what I know, none of the three Korean companies pay dividends.
  • earnings per share (EPS) is a measure of a firm’s profitability, calculated by first subtracting dividends paid from net income, and dividing by the number of company stocks total.
  • price-earnings ratio (P/E) is calculated by taking the current price of the stock and dividing it by EPS. Essentially, P/E is a measure of how much investors are willing to pay per unit of earnings. For example, Amazon’s P/E ratio is 3,085.12, meaning that investors are willing to fork over $3,805.12 for $1 in earnings from Amazon. The higher the P/E ratio, generally, the higher expectations for the company in the future. New companies which are volatile and have suspicious-looking revenue but have good promise will also sport high P/E, like Facebook, with 267.34. Companies with high growth rates will also have high P/E. However, remember that P/E should only be compared within similar industries in the same countries. Different accounting styles in different countries can result in different P/E; American P/E are traditionally higher than European P/E.
  • trailing twelve months (TTM) is an abbreviation which indicates the timeframe of measurements like EPS and P/E.

With all that good terminology under our belts, we can start looking at the respective P/E.

S.M. Entertainment Co P/E (TTM): 452.52
YG Entertainment Inc P/E (TTM): 38.66
JYP Entertainment Corp P/E (TTM): n/a

General P/E for Entertainment – Diversified: 28.40

Wait, why is there no P/E for JYP? For the past twelve months, JYP has been posting -156.00KRW EPS (TTM); essentially, people who have bought JYP stocks have been losing money for the past year; for every share, they have lost around 156KRW, where KRW is South Korea’s currency. What this means for JYP is that it is in very big doo-doo, and has probably been losing money in 2012; we can investigate this hunch when we look at JYP’s income and cash flow statements. When the EPS (the denominator) is negative, it is convention to not report the P/E.

Ignoring JYP, let us examine S.M. and YG. S.M. and YG are clearly above the industry average of 28.40, YG alone is above by a staggering 50%. This signals that the market clearly expects S.M. and YG to have huge headliners in the years to come. Moreover, the world economy is slowly growing, and so consumers– especially those in North America and Europe– who have made cutbacks to their spending in entertainment will increase their spending in 2013. This raises the entire entertainment industry’s P/E.

However, S.M.’s P/E is much higher than YG, suggesting that analysts feel that S.M. has more future growth potential than YG. Also, looking at market capitalization, S.M. is worth only $200 million more than YG. Therefore, the size of these companies are actually quite similar, but even then, S.M.’s P/E is still disportionately high. From the beginning, I have wholeheartedly agreed with the outlook that S.M. has the stronger growth potential. For one, S.M. has successfully tapped the Japan and Taiwan markets so far, using TVXQ, BoA, Super Junior M, and most recently, SHINee, SNSD, EXO-M. S.M. also is the most aggressive in recruiting Chinese and English-speaking trainees, and has the largest pool of applicants to choose from. Moreover, S.M. has a huge roster of big-name acts which have legitimately toured the world for several years, compared to YG, which currently only has Psy, BIGBANG and 2NE1, the latter two which focus mostly on Korea, and only recently stepped up overseas concert touring. Psy has signed with Schoolboy Records to promote in the US, and I doubt much of that revenue stream will reach YG– that is, if Psy manages to keep himself from being a one-hit wonder. This is a tall order because I am not entirely convinced Psy can continue to sing in Korean when releasing in the United States.

However, the excessively high P/E ratio may indicate S.M. is actually overvalued, which means that holders of S.M. stock should sell. I highly doubt this, because even though the P/E is really astronomical compared to YG, it is clear that S.M. has strong sources of revenue for the future and definitely stands to increase their net profit; perhaps not as much as expected, but well enough to make a healthy return on investment.

In sum, while it is interesting to compare to P/E ratios of similar companies, one must be reminded that a P/E ratio is not the most accurate measurement of projected future earnings and is only one of the things an investor should look at to determine the health of a company. Of course, from the standpoint of a pretentious know-it-all, while arguing the respective futures of S.M. and YG, I imagine lashing out their P/E ratios as evidence of S.M.’s crushing dominance would be quite fun.

Advertisements

7 thoughts on “[kpop/finance] examining the P/E ratio of S.M. Entertainment Co, YG Entertainment Inc, and JYP Entertainment Corp

  1. I think I should join you in this finance adventure. I’ve been curious about economics and finances, but never got around to learn it. Totally a science person here, I wish I had taken a module back in high school and college.
    Anyway, you made it very easy to understand for a noob like me. Thank you! ^-^
    This is all very interesting. I love how SM’s P/E is so different from YG, I love big differences! YG has more than 3 artists/group, if you don’t mind me correcting, SE7EN, Epik High, Lee Hi, Gummy and Kang Seung-yoon are housed under YG. And there is supposed to be quite a few groups coming from YG too.
    But I agree that SM has more potential for market growth, considering the way it keeps producing one group after another, with all of them looking promising. And JYP entertainment disappoints me…..I don’t like not seeing numbers. It saddens me.
    I hope you keep blogging about the finances! It’s very interesting! It gives me a break from all the sciences. ^^

    x
    Rosie

    • thanks! throughout the whole thing, I was worried that I didn’t explain some things enough.. for example, I didn’t explain net income. I thought that should be somewhat explanatory?

      I should have clarified. I mean, YG has only three headliner artists these days. Of course, Se7en, Epik High, etc are very important parts of YG, but I’m sure that 2NE1, BIGBANG, Psy, are the ones that are pulling in most of YG’s revenue these days. I’d say combined, close to 90%. Especially since Se7en is going into the army soon, and Psy is such a big hit overseas. I wouldn’t be surprised if Psy’s earnings overtook BIGBANG for 2012. For SM, in contrast, there’s SuJu, TVXQ, SHINee, EXO, SNSD, BoA, f(x).. especially f(x), which has really grown this past year..

      I’m glad you like it! I will work hard to continue this topic. ^^
      Michelle

  2. Thanks for the write-up. As an Economics grad, I’m so glad to see others in our field applying our academic knowledge to our hobbies, especially since K-Pop seems to be lacking attention from people coming from the field of finance.

    Would love to read more from you :)

    • if you click on SM P/E link, that’s where I got it. Financial Times. There could be a discrepancy how FT and Bloomberg report it. I got all my PE from FT, so it should be consistent across FT, at least.

      Michelle

Share your thoughts

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s