Mirae Asset Securities logo

China revenue estimates

Raise TP by 24% to W52,000

We raise our target price for Dear U by 24% to W52,000 (from W42,000), which is based on a target P/E of 27.4x and our 2025F net profit attributable to owners of the parent (W44.9bn). Previously, our target multiple reflected a 10% premium to account for potential upside from the partnership with Tencent Music Entertainment (TME). Now, with Dear U’s services set to launch on a TME platform in 2Q25, we are able to make earnings assumptions based on different scenarios (rather than relying on a broad premium). We conservatively incorporated the base case scenario (see below) into our China earnings estimates and accordingly removed the valuation premium.

Estimates for China revenue by scenario

Currently, Dear U’s services are accessible only on iOS in China. Thus, when projecting potential revenue from the TME partnership, the key factor to consider is the potential influx of Chinese K-pop fans who do not utilize Apple devices. In order to estimate how many additional Chinese fans will use Dear U’s services once accessibility is expanded, we first examined other markets to determine appropriate iOS user share assumptions. Specifically, we considered: 1) Dear U’s average share of iOS users in Asian countries where K-pop is already popular (bear case); 2) the global average iOS share (base case); and 3) the average iOS share in countries with per-capita GDP (PPP) levels similar to China’s (bull case). Based on our analysis, we estimate additional Chinese users and royalties for 2025 at: 1) 330,000/W1.5bn based on the bear case; 2) 630,000/W2.8bn based on the base case; and 3) 1.91mn/W8.6bn based on the bull case.

4Q24 review and 2025 outlook

For 4Q24, Dear U reported consolidated revenue of W17.8bn and operating profit of W4.9bn. Subscriber count declined to 1.9mn, while costs rose due to: 1) R&D for the AI Pet service launch (W0.5bn); and 2) expenses related to the establishment of a North American subsidiary. In 2025, both revenue and operating profit are likely to improve. Dear U is expected to officially become a subsidiary of SM Entertainment in 2Q25, which should lead to the launch of services related to new artists/IP. For China revenue, we applied our base case assumptions (assuming service launch in 2Q25). Meanwhile, from 2Q25, the introduction of a payment gateway (PG) service is expected to bring payment transaction fees (typically 30% of transaction value) down to 3-10%.