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Home , Blackpink, BTS, IKon, Love Scenario, YG Entertainment

YG Entertainment (122870 KQ ) Riding high

Entertainment beats out BTS in November YouTube views BLACKPINK and BTS are currently the two biggest K-pop acts on the global music scene. BTS is once again demonstrating its global influence through its 20-city world Company Update tour (from August 2018 to April 2019), with concert tickets reselling (unofficially) for up December 5, 2018 to millions of won and long lines of fans camping outside concert venues. Meanwhile, BLACKPINK has built a huge fan base online, with the group’s YouTube channel attracting 15.3mn subscribers as of December 5 th (a threefold increase from 5.3mn at end-2017, and 81% of BigHit Entertainment’s 19mn subscribers). According to market data, BLACKPINK’s YouTube channel was viewed 370mn times in (Maintain) Buy November, beating out BTS (BigHit Entertainment and Bangtan TV), which had 210mn views during the month. The number was also higher than the level seen during the Target Price (12M, W) 60,000 height of the group’s mega hit “DDU- DDU-DU” (average of 340mn views in June- July ). What’s even more encouraging is that the strong traffic does not appear to be driven solely by Jennie’s new song (“SOLO”). Amid an overall increase in YouTube users, Share Price (12/05/18, W) 44,500 we believe YG Entertainment’s growing content library—combined with frequent uploads and the rising influence of various versions of content—is driving the huge Expected Return 35% number of views. We thus believe traffic growth is sustainable and structural. Of note, “SOLO” (November) has already bee n viewed 100mn times, compared with 520mn times for “DDU-DU DDU-DU” (June).

OP (18F, Wbn) 12 Expectations through 2019 remain low, but potential catalysts are growing Consensus OP (18F, Wbn) 11 It is widely anticipated that Big Bang’s absence will lead to an earnings void through 2019. While expectations have been lowered as a result , we see an increasing number EPS Growth (18F, %) -55.8 of potential catalysts that could drive a gradual upgrade in earnings estimates: Market EPS Growth (18F, %) 10.2 1) As the company’s resources and fan bases shift toward its next-generation artists , P/E (18F, x) 108.1 their activities are rapidly expanding. Both WINNER and iKON have remained busy Market P/E (18F, x) 8.6 after wrapping up their tours in November. WINNER is scheduled to go on a KOSDAQ 701.12 seven-city North American tour in January (followed by a Japanese tour), while iKON is set to perform two dome concerts in and release a repackaged version of their Market Cap (Wbn) 809 album at the end of the year (followed by a Japanese tour) . Meanwhile, Shares Outstanding (mn) 20 BLACKPINK will hold a dome concert in Japan at the end of the year and a seven- country tour in Asia from January to March, followed by another stop in . Free Float (%) 62.7 Group member Rose is also getting ready for a solo debut, and a second group album Foreign Ownership (%) 14.7 is in the works. Beta (12M) 0.74 2) A new boy group will debut in 1H19 as part of the company’s show, YG Treasure Box. 52-Week Low 27,000 Three of the show’s 10 episodes have aired so far, and have been viewed 26mn times 52-Week High 46,700 on and YouTube combined. The show has been more popular in Japan and Southeast Asia than in Korea, and the winning group is likely to include a Japanese (%) 1M 6M 12M member. Of note, w e believe the company has already recovered most of the show’s Absolute 18.5 56.7 45.4 production costs by taking advantage of its multi-platform format. This change in profit Relative 17.0 96.0 60.6 structure is particularly meaningful, given that content production losses totaled W9.6bn over the past four quarters.

170 YG Entertainment KOSDAQ Benefiting from new media 150 We maintain our Buy rating and target price of W60,000 on YG Entertainment. Given K- 130 pop’s growing status and the increasing value of music video content, w e believe 110 Korean entertainment firms overall will be nefit from the rise of new media. Among them, we think YG Entertainment has gained the most traction. The company is 90 continuing to demonstrate strong YouTube traffic growth, led by BLACKPINK. Ad rates 70 also have strong upside potential (more than double), c onsidering the company’s 11.17 3.18 7.18 11.18 favorable position in talks regarding the e stablishment of Music & Creative Partners Asia (MCPA; a Korean version of VEVO), and potential geographical mix improvement s Mirae Asset Daewoo Co., Ltd. (increased exposure to the US).

[ Media ] FY (Dec.) 12/15 12/16 12/17 12/18F 12/19F 12/20F Revenue (Wbn) 193 322 350 289 304 450 -yeob +822 -3774 -1652 OP (Wbn) 22 32 24 12 26 54 [email protected] OP margin (%) 11.4 9.9 6.9 4.2 8.6 12.0

NP (Wbn) 28 19 18 8 22 45 EPS (W) 1,700 1,094 931 412 1,107 2,304 ROE (%) 14.7 7.7 5.7 2.3 6.0 11.6

P/E (x) 26.2 25.9 31.0 108.1 40.2 19.3 P/B (x) 3.6 1.8 1.6 2.5 2.3 2.1 Dividend yield (%) 0.8 0.7 0.5 0.3 0.3 0.3 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates

December 5, 2018 YG Entertainment

Table 1. Quarterly and annual earnings (Wbn, %, mn, %p) 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18F 2018F 2019F 2020F Revenue 107 72 75 95 77 63 65 83 289 304 450 Products 27 32 24 50 20 26 30 37 112 139 201 Albums 18 22 16 17 13 16 17 21 12 19 27 Goods 8 9 8 34 6 9 13 16 45 54 87 Management 80 41 51 45 58 37 30 46 171 165 249 Concerts 13 7 21 15 2 1 5 11 19 33 64 Advertising 9 12 10 8 7 8 7 5 27 27 27 Royalties 49 6 5 1 35 5 4 11 54 41 87 Appearance fees 5 4 5 6 3 5 4 6 17 16 19 Commissions 4 11 9 11 8 18 9 11 45 40 42 Production 0 0 0 4 3 0 1 3 8 8 10 Gross profit 33.0 24.6 20.8 22.3 20.5 21.7 21.5 24.1 88 102 148 Operating profit 14.8 4.3 1.5 4.6 2.3 1.4 2.6 6.0 12 26 54 OP margin 13.9 6.0 2.0 4.8 3.0 2.3 4.4 7.2 4.3 8.7 12.1 Pretax profit 13.6 6.0 7.8 2.6 2.9 1.7 3.2 4.8 13 27 56 Net profit 6.0 4.7 5.3 -4.1 0.8 -0.4 1.1 3.3 5 19 39 Net margin 5.6 6.6 7.1 -4.3 1.0 -0.6 1.9 4.0 1.7 6.2 8.7 Controlling interests 7.3 4.4 6.2 -0.1 2.3 -0.1 2.0 3.8 8.0 21.6 45.0 YoY Revenue 46.5 -6.5 -25.7 35.8 -27.7 -13.2 -13.3 -12.7 -17.5 5.5 48.0 Products 43.9 46.5 -0.9 91.9 -26.3 -18.6 24.5 -26.1 -15.2 24.0 44.2 Management 47.4 -27.1 -33.6 2.6 -28.0 -9.0 -41.8 2.2 -21.4 -3.5 51.3 Gross profit 42.2 7.1 -27.5 10.6 -37.8 -11.8 3.4 8.4 -12.7 16.2 45.0 Operating profit 56.3 -36.1 -87.8 30.0 -84.4 -67.2 77.8 31.7 -50.8 112.9 105.7 Net profit -6.8 -27.8 133.7 RR -87.0 TTR -78.8 TTB -59.2 287.3 108.2 Major assumptions Ticket sales volume in Japan 0.1 0.5 0.5 0.8 0.1 0.0 0.2 0.2 0.5 0.9 2.2 Source: Company data, Mirae Asset Daewoo Research estimates

Figure 1. 24-month forward P/E band

(W) 64x 40x 70,000

60,000 25x 50,000

40,000 19x

30,000

20,000

10,000 14.1 14.7 15.1 15.7 16.1 16.7 17.1 17.7 18.1 18.7

Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 2 December 5, 2018 YG Entertainment

Figure 2. YG Entertainment’s YouTube-related net revenue growing rapidly on simultaneous growth in prices and volume

(Wbn) 18 YouTube (Google) net revenue 16

15 13 12

9 8 6 6 3 3

0 2016 2017 2018F 2019F 2020F

Source: Mirae Asset Daewoo Research

Figure 3. BLACKPINK’s YouTube view count set a new record in November

(mn views)

500 BLACK PINK YG (YG ENTERTAINMENT + BLACK PINK + iKON + WINNER) Big Hit (ibighit + BangtanTV) 400

300

200

100

0 15.9 16.1 16.5 16.9 17.1 17.5 17.9 18.1 18.5 18.9

Source: Mirae Asset Daewoo Research

Figure 4. Quarterly YouTube view count by company

(mn views) View count forecast 1,600 SM (SMTOWN) JYP (jypentertainment + ) YG (YG ENTERTAINMENT + BLACK PINK + iKON + WINNER) 1,200 Big Hit (ibighit + BangtanTV)

800

400

0 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18F 1Q19F 2Q19F 3Q19F 4Q19F 1Q20F 2Q20F 3Q20F 4Q20F

Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 3 December 5, 2018 YG Entertainment

Table 2. Overview of YG Treasure Box YG Entertainment Overview New idol group debut survival show 10-episode show; began to air in November 16, 2018 Five members of a new boy group are expected to be selected (subject to changes) 10:00pm on ’s V Live; 12:00am on both YouTube/JTBC2 The number of supports (e.g., follower, view counts) turns into a ranking Friday, Vlive 22:00 Saturday, JTBC 2 00:00 Sunday, JTBC 00:20 Released November 16 2018 Presenter Jang Sung-kyu Cast Yang Hyun Suk, and YG trainees Platforms YouTube Vlive NaverTV Source: Mirae Asset Daewoo Researc h

Figure 5. V LIVE subscriber count: Japan ＞＞＞ ＞＞＞

Source: Instagram, V LIVE, Mirae Asset Daewoo Research

Figure 6. YouTube view count by artist for the past 90 days: Rise in contribution of developed markets to drive up CPM

(mn views) (%) Other countries Latin America Southest Asia Korea/Japan US 1,500 Other countries 100 Latin America Southest Asia 80 1,200 Korea/Japan US 900 60

600 40

34.7 300 20 11.8 11.6 19.5 14.0 12.5 6.9 13.0 2.7 10.6 6.3 7.1 7.4 0 0 4.8 4.8 4.9 BTS BLACK iKON WINNER NCT TWICE BTS BLACK iKON WINNER EXO NCT TWICE GOT7 PINK PINK

Source: YouTube, Mirae Asset Daewoo Research Source: YouTube, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 4 December 5, 2018 YG Entertainment

Figure 7. Japanese concert attendance to exceed previous highs in 2020

(mn persons) 2.8 YG Family BLACK PINK 2.4 iKON WINNER 2.0 2NE1 1.6 BIG BANG 1.2

0.8

0.4

0.0 2012 2013 2014 2015 2016 2017 2018F 2019F 2020F Source: Mirae Asset Daewoo Research

Figure 8 .BLACK PINK signs global partnership deal with Universal Music

Source: Billboard , Mirae Asset Daewoo Research

Figure 9. YG Entertainment’s comments indicate upbeat expectations for BLACKPINK solo projects and WINNER

Source: Yang Hyun-suk’s Instagram account, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 5 December 5, 2018 YG Entertainment

YG Entertainment (122870 KQ/Buy/TP: W60,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/17 12/18F 12/19F 12/20F (Wbn) 12/17 12/18F 12/19F 12/20F Revenue 350 289 304 450 Current Assets 307 336 360 404 Cost of Sales 249 201 202 302 Cash and Cash Equivalents 99 151 186 213 Gross Profit 101 88 102 148 AR & Other Receivables 40 35 34 39 SG&A Expenses 77 76 76 94 Inventories 18 16 16 25 Operating Profit (Adj) 24 12 26 54 Other Current Assets 150 134 124 127 Operating Profit 24 12 26 54 Non-Current Assets 276 246 239 265 Non-Operating Profit 6 1 1 2 Investments in Associates 14 12 12 19 Net Financial Income 7 5 5 4 Property, Plant and Equipment 87 97 93 90 Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 63 61 58 56 Pretax Profit 30 13 27 56 Total Assets 584 583 598 670 Income Tax 18 8 8 17 Current Liabilities 73 66 66 99 Profit from Continuing Operations 12 5 19 39 AP & Other Payables 47 41 41 63 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 2 3 3 3 Net Profit 12 5 19 39 Other Current Liabilities 24 22 22 33 Controlling Interests 18 8 22 45 Non-Current Liabilities 78 82 82 83 Non-Controlling Interests -6 -3 -3 -6 Long-Term Financial Liabilities 75 80 80 80 Total Comprehensive Profit 6 5 19 39 Other Non-Current Liabilities 3 2 2 3 Controlling Interests 13 21 90 188 Total Liabilities 151 148 148 183 Non-Controlling Interests -7 -16 -72 -149 Controlling Interests 343 350 369 410 EBITDA 34 21 34 60 Capital Stock 9 9 9 9 FCF (Free Cash Flow) -8 7 26 53 Capital Surplus 209 209 209 209 EBITDA Margin (%) 9.7 7.3 11.2 13.3 Retained Earnings 124 130 149 191 Operating Profit Margin (%) 6.9 4.2 8.6 12.0 Non-Controlling Interests 89 85 82 77 Net Profit Margin (%) 5.1 2.8 7.2 10.0 Stockholders' Equity 432 435 451 487

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/17 12/18F 12/19F 12/20F 12/17 12/18F 12/19F 12/20F Cash Flows from Op Activities 22 24 26 53 P/E (x) 31.0 108.1 40.2 19.3 Net Profit 12 5 19 39 P/CF (x) 12.9 38.9 27.2 14.4 Non-Cash Income and Expense 31 18 13 21 P/B (x) 1.6 2.5 2.3 2.1 Depreciation 4 5 4 3 EV/EBITDA (x) 13.8 34.2 20.5 11.1 Amortization 6 4 3 3 EPS (W) 931 412 1,107 2,304 Others 21 9 6 15 CFPS (W) 2,245 1,144 1,634 3,088 Chg in Working Capital -7 9 0 8 BPS (W) 17,816 18,148 19,116 21,281 Chg in AR & Other Receivables -13 6 0 -3 DPS (W) 150 150 150 150 Chg in Inventories -4 2 0 -9 Payout ratio (%) 22.7 55.7 14.4 6.9 Chg in AP & Other Payables 15 -19 0 6 Dividend Yield (%) 0.5 0.3 0.3 0.3 Income Tax Paid -22 -14 -8 -17 Revenue Growth (%) 8.7 -17.4 5.2 48.0 Cash Flows from Inv Activities -54 14 11 -16 EBITDA Growth (%) -12.8 -38.2 61.9 76.5 Chg in PP&E -30 -17 0 0 Operating Profit Growth (%) -25.0 -50.0 116.7 107.7 Chg in Intangible Assets -5 -1 0 0 EPS Growth (%) -14.9 -55.7 168.7 108.1 Chg in Financial Assets 11 50 11 -16 Accounts Receivable Turnover (x) 10.7 8.2 9.3 13.1 Others -30 -18 0 0 Inventory Turnover (x) 20.1 16.7 18.9 22.1 Cash Flows from Fin Activities 71 1 -3 -3 Accounts Payable Turnover (x) 22.7 18.2 19.7 23.3 Chg in Financial Liabilities 10 6 0 0 ROA (%) 2.2 0.8 3.2 6.2 Chg in Equity 50 0 0 0 ROE (%) 5.7 2.3 6.0 11.6 Dividends Paid -4 -3 -3 -3 ROIC (%) 7.1 2.0 10.9 24.1 Others 15 -2 0 0 Liability to Equity Ratio (%) 35.1 34.1 32.8 37.5 Increase (Decrease) in Cash 37 52 35 27 Current Ratio (%) 419.4 510.5 548.4 407.6 Beginning Balance 62 99 151 186 Net Debt to Equity Ratio (%) -32.8 -40.5 -44.4 -44.7 Ending Balance 99 151 186 213 Interest Coverage Ratio (x) 14.0 5.8 12.5 25.7 Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 6 December 5, 2018 YG Entertainment

APPENDIX 1

Important Disclosures & Disclaimers 2-Year Rating and Target Price History

Company (Code) Date Rating Target Price (W) YG Entertainment YG Entertainment (122870) 10/24/2018 Buy 60,000 80,000 08/12/2018 Buy 43,000 07/22/2018 Trading Buy 43,000 60,000 05/13/2018 Trading Buy 30,000 02/22/2018 Trading Buy 32,000 40,000 12/05/2017 Buy 39,000 20,000 09/05/2017 Buy 35,000

01/02/2017 No Coverage 0 11/09/2016 Buy 36,000 12 16 12 17 12 18

Stock Ratings Industry Ratings Buy : Relative performance of 20% or greater Overweight : Fundamentals are favorable or improving Trading Buy : Relative performance of 10% or greater, but with volatility Neutral : Fundamentals are steady without any material changes Hold : Relative performance of -10% and 10% Underweight : Fundamentals are unfavorable or worsening Sell : Relative performance of -10% Ratings and Target Price History (Share price (─), Target price (▬), Not covered ( ■), Buy (▲), Trading Buy (■), Hold (●), Sell ( ◆)) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Mirae Asset Daewoo Co., Ltd., we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst’s estimate of future earnings. * The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions.

Equity Ratings Distribution & Investment Banking Services Buy Trading Buy Hold Sell Equity Ratings Distribution 73.71% 13.92% 12.37% 0.00% Investment Banking Services 82.61% 4.35% 13.04% 0.00% * Based on recommendations in the last 12-months (as of September 30, 2018)

Disclosures As of the publication date, Mirae Asset Daewoo Co., Ltd. and/or its affiliates do not have any special interest with the subj ect company and do not own 1% or more of the subject company's shares outstanding.

Analyst Certification The research analysts who prepared this report (the “Analysts”) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws or regulations thereof. Each Analyst responsible for the preparation of this report certifies that (i) all views expressed in this report accurately reflect the personal views of the Analyst about any and all of the issuers and securities named in this report and (ii) no part of the compensation of the Analyst was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report. Mirae Asset Daewoo Co., Ltd. (“Mirae Asset Daewoo”) policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst’s area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. Like all employees of Mirae Asset Daewoo, the Analysts receive compensation that is determined by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Mirae Asset Daewoo except as otherwise stated herein.

Disclaimers This report was prepared by Mirae Asset Daewoo, a broker-dealer registered in the Republic of Korea and a member of the . Information and opinions contained herein have been compiled in good faith and from sources believed to be reliable, but such information has not been independently verified and Mirae Asset Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the . In case of an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws or regulations or subject Mirae Asset Daewoo or any of its affiliates to registration or licensing requirements in any jurisdiction shall receive or make any use hereof. This report is for general information purposes only and it is not and shall not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The report does not constitute investment advice to any person and such person shall not be treated as a client of Mirae Asset Daewoo by virtue of receiving this report. This report does not take into account the particular investment objectives, financial

Mirae Asset Daewoo Research 7 December 5, 2018 YG Entertainment

situations, or needs of individual clients. The report is not to be relied upon in substitution for the exercise of independent judgment. Information and opinions contained herein are as of the date hereof and are subject to change without notice. The price and value of the investments referred to in this report and the income from them may depreciate or appreciate, and investors may incur losses on investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. Mirae Asset Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising out of the use hereof. Mirae Asset Daewoo may have issued other reports that are inconsistent with, and reach different conclusions from, the opinions presented in this report. The reports may reflect different assumptions, views and analytical methods of the analysts who prepared them. Mirae Asset Daewoo may make investment decisions that are inconsistent with the opinions and views expressed in this research report. Mirae Asset Daewoo, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Mirae Asset Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making or other financial services as are permitted under applicable laws and regulations. No part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Mirae Asset Daewoo.

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Mirae Asset Daewoo Research 8 December 5, 2018 YG Entertainment

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Mirae Asset Daewoo Research 9