Entertainment OVERWEIGHT April 18, 2019

Home , Cube Entertainment, Day6, Golden Disc Awards, Got7, JYP Entertainment, Stray Kids

Industry Note Entertainment OVERWEIGHT April 18, 2019

K-pop: defying boundaries

K-pop industry has indirect but significant impact on Korea’s exports and inbound tourism

Entertainment We estimate Korea’s K-pop industry to be worth KRW3-4tn as of 2017 which represents 0.2% of Korea’s 2017 GDP of Peter Yoo KRW1,730tn. While it makes up only a small portion of the country’s GDP, K-pop has a significant influence on Korea’s

+822-3787-2574 exports and inbound tourism. According to a survey of foreigners who have visited Korea, the first thing that comes to [email protected] mind when the word Korea is mentioned is K-pop and the biggest factor that drives them to buy Korea-made products and travel to Korea is also K-pop. Indeed, K-pop is an important factor driving Korea’s exports and foreigners’ visits.

Burning Sun scandal to help the K-pop industry mature further The entertainment sector suffered major corrections after the Burning Sun club scandal which involved several K-pop idols and celebrities. The scandal tarnished the previously innocent images of K-pop idols and with allegations made

against more idols, the stocks were hit hard. However, negative sentiment is mostly priced in, and shares have started

to stabilize. On the positive side, we believe the scandal is a wakeup call for the K-pop industry which will eventually

help it to mature further to fit global standards, by prompting entertainment agencies to establish a culture that

places more value on ethics and morals.

Top picks: JYP for its rich pool of new artists and SM for NCT127 and Chinese momentum We present JYP Entertainment (035900.KS, BUY) and SM Entertainment (041510.KS, BUY) as our sector top picks. We like JYP for: 1) marked earnings growth helped by Twice’s Japanese dome tour and increasing global activities by GOT7, Stray Kids, and DAY6; 2) new act Itzy’s potential monetization in 2020 given the girl group’s explosive start which

surpassed everyone’s expectations; and 3) expectations for the localization strategy with a fully localized girl group

called NIZI slated to debut in 2H19 in Japan in a collaboration with Sony. As for SM, we expect: 1) NCT127 to become a

world-class act after its world tour, following the footsteps of EXO; and 2) its strong artist lineup and content

production ability to be highlighted when China reopens its door to Hallyu content.

K-pop artists’ success formula

SNS & YouTube Fandom awareness Enter global charts increases increases

Japanese dome North America/ tour Europe concerts

Source: Hyundai Motor Securities

INDUSTRY NOTE

Fig 1. Content product sales caused by the Korean Wave Fig 2. Increase in exports caused by the Korean Wave 2017 2014 2015 2016 2017 2014 2015 2016 2017E Growth Foods 770 789 783 837 rate (%) Broadcast 314 299 340 534 57.1 Cosmetics 349 552 673 797 Music 306 347 410 497 21.2 Apparels 304 286 312 308 Movies 20 23 31 33 5.8 Accessories 57 53 128 304 Animation/ 255 290 315 321 1.8 Household Character 500 434 374 291 electronics Games 1,564 1,691 2,016 2,322 15.2 Books 104 96 105 112 7.3 Automobiles 861 783 446 461 Total 2,563 2,745 3,218 3,820 18.7 Tours 1,151 1,162 1,350 1,052

Source: KOFICE, Hyundai Motor Securities Source: KOFICE, Hyundai Motor Securities

Fig 3. Total inbound traveler volume by month Fig 4. Tourism profit trends in Korea

('000) Total (L) YoY (R) 2,000 200% (USD mn) Tourism earnings(L) Expansion of the Korean Wave in 2008 (USD mn) 24,000 (expanded to China and Southeast Asia) Tourism expenses(L) 23,000 21,000 Beginning of the Korean Wave in 2003 20,000 150% Tourism profits(R) 1,600 18,000 (led by Japan) 17,000 15,000 Overseas travel 14,000 100% 12,000 deregulation in 1981 11,000 1,200 9,000 8,000 50% 6,000 5,000 2,000 3,000 800 -1,000 0 0% -4,000 85 87 89 91 93 96 98 0 02 04 06 08 10 12 14 16 18 -3,000 -7,000 400 -6,000 -50% -10,000 -9,000 Reduction of loss -13,000 -12,000 -16,000 0 -100% 15.1 15.9 16.05 17.01 17.09 18.05 19.01

Source: KCTI, Hyundai Motor Securities Source: ECOS, Hyundai Motor Securities

Fig 5. Entertainment companies’ share price performance Fig 6. Key entertainment companies’ sales in Japan

SM YG Entertainment (Jan'19=100pt) JYP Ent. Cube SM YG JYP CUBE 250 35% Beginning of the 'Burning Sun' issue 30% 200 25%

150 20% 100 15% 10% 50 5%

0 0% 19.01 19.02 19.03 19.04 2016 2017 2018

Source: Respective company data, Hyundai Motor Securities Source: Respective company data, Hyundai Motor Securities

2 Entertainment/ Leisure Peter Yoo +822-3787-2574 / [email protected]

Fig 7. Entertainment companies’ sales from YouTube Fig 8. Entertainment cos’ sales growth rate from YouTube

( KRW bn) SM YG JYP CUBE 10 SM YG JYP CUBE 120% 8 100%

6 80% 60% 4 40% 2 20% 0 0% 2016 2017 2018 2019F 2017 2018 2019F

Source: Respective company data, Hyundai Motor Securities Source: Respective company data, Hyundai Motor Securities

Fig 9. Entertainment companies’ music export profit trends Fig 10. Ent. cos’ music export profit trend growth rate

(KRW bn) SM YG JYP Cube SM YG JYP Cube 50 140% 120% 40 100% 30 80%

20 60% 40% 10 20% 0 0% 2016 2017 2018 -20% 2017 2018

Source: Respective company data, Hyundai Motor Securities Source: Respective company data, Hyundai Motor Securities

Fig 11. Sales composition in music industry Fig 12. Global music streaming market

Physical Digital Streaming Performance rights Synchronisation revenues (USD bn) 2% 14% 7 6 36% 5 CAGR: 55.2% 4 3 2

38% 1 0 16% 2012 2013 2014 2015 2016 2017 Source: IFPI, Hyundai Motor Securities Source: IFPI, Hyundai Motor Securities

3 INDUSTRY NOTE

Fig 13. Record importation revenues trends Fig 14. Chinese mobile music market size and trends

Record importation revenue(L) (CNY mn) (%) Market size(L) YoY(R) YoY(R) (CNY mn) (%) 700 15 18 45 16 40 600 10 14 35 500 5 12 30 400 10 25 0 300 8 20 -5 6 15 200 4 10 -10 100 2 5 0 -15 0 0 2011 2012 2013 2014 2015 2013 2014 2015 2016 2017 2018

Source: KOFICE, Hyundai Motor Securities Source: KOFICE, Hyundai Motor Securities

Fig 15. BTS profile Fig 16. BTS search trends Member RM (leader), Sugar, Jin, J-hope, Jimin, V, Jungkook Company Big Hit Entertainment (Pt) 100 Debut 2013 single album [2 COOL 4 SKOOL] 90 80 2019 8th Gaon Music Awards, K-POP Contribution of the Year, Awards 70 The 33rd Golden Disc Awards, Album of the Year 60 50 40 Album ‘Map of the soul: Persona’ release 30 The day with the largest number of 2019.05 World tour 20 searches=100 pt Activities 2019.02.10 Grammy awards presenter 10 2018.11 US Times cover model 0 16.01 16.07 17.01 17.07 18.01 18.07 19.01

Source: Media reports, Hyundai Motor Securities Source: Google, Hyundai Motor Securities

Fig 17. Big Hit Entertainment financial results Fig18. Big Hit Entertainment’s market cap forecasts 2016 2017 2018 2019F P/E 2019F net profit Market cap Revenue 35.2 92.4 214.2 345.2 (X) (KRW bn) (KRW tn)

Operating profit 10.4 32.5 64.1 92.4 20 73.5 1.5

Net profit 9.0 24.6 50.2 73.5 30 73.5 2.2 OPM (%) 29.5 35.% 29.9 26.8

Net profit margin 40 73.5 2.9 25.6 26.6 23.4 21.3 (%) Source: Big Hit Entertainment, Hyundai Motor Securities Source: Big Hit Entertainment, Hyundai Motor Securities

4 Entertainment/ Leisure Peter Yoo +822-3787-2574 / [email protected]

Investment rating and target price history Two-year price chart Difference (%) Date Rating TP Average High/Low (KRW’000) 18/11/22 BUY 46,500 -33.7 -27.7 50 19/01/28 BUY 46,500 -35.1 -27.7 45 19/03/13 BUY 46,500 -34.9 -27.7 40 35 19/04/18 BUY 42,000 - - 30

20 15 10 JYP Entertainment 5 Target price 0 17.04 17.07 17.10 18.01 18.04 18.07 18.10 19.01 19.04

Investment rating and target price history Two-year price chart Difference (%) Date Rating TP Average High/Low 17/08/17 BUY 38,000 -21.7 -15.9 (KRW’000) 80 17/10/25 BUY 38,000 -19.1 -5.0 70 17/11/15 BUY 46,000 -22.3 -15.9 18/01/17 BUY 46,000 -20.2 -13.2 60 18/03/12 BUY 50,000 -13.8 -10.0 50 18/03/26 BUY 50,000 -18.6 -4.4 40 18/05/16 BUY 50,000 -18.4 -4.4 30 18/07/24 BUY 50,000 -18.6 -4.4 20 18/08/16 BUY 50,000 -14.7 4.4 SM 10 Target price 18/10/17 BUY 60,000 -21.9 -12.3 0 18/11/15 BUY 70,000 -26.4 -19.9 17.04 17.07 17.10 18.01 18.04 18.07 18.10 19.01 19.04 19/01/25 BUY 70,000 -28.8 -19.9 19/03/11 BUY 70,000 -32.6 -19.9 19/04/18 BUY 56,000 - -

Investment rating and target price history Two-year price chart Difference (%) Date Rating TP Average High/Low 17/04/21 BUY 37,000 -14.6 -8.1 (KRW’000) 17/05/12 BUY 44,000 -26.3 -17.8 60 17/07/21 BUY 39,000 -24.7 -19.2 50 17/08/14 BUY 36,000 -25.0 -21.1 17/10/24 BUY 36,000 -23.0 -14.6 40 17/11/13 BUY 36,000 -20.0 -7.4 30 18/01/29 BUY 36,000 -19.9 -7.4 20 18/02/23 BUY 34,000 -13.5 -4.7 18/05/15 BUY 32,000 5.5 30.5 10 YG Entertainment 18/08/13 BUY 41,000 -1.1 13.9 Target price 0 18/11/12 BUY 45,000 -1.3 8.8 17.04 17.07 17.10 18.01 18.04 18.07 18.10 19.01 19.04 19/02/22 BUY 55,000 -30.0 -13.6 19/04/18 BUY 50,000 - -

5 INDUSTRY NOTE

Investment rating and target price history Two-year price chart Difference (%) Date Rating TP Average High/Low (KRW’000) 19/04/18 BUY 7,000 - - 8 7 6

2 Cube Entertainment 1 Target price 0 17.04 17.07 17.10 18.01 18.04 18.07 18.10 19.01 19.04

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Investment rating Hyundai Motor Securities offers three sector investment ratings based on six-month forward fundamentals and share price outlook. • OVERWEIGHT: Sector-wide fundamentals and share prices are expected to turn up. • NEUTRAL: No meaningful fundamental improvement is expected. • UNDERWEIGHT: Sector-wide fundamentals and share prices are expected to turn down.

Hyundai Motor Securities offers three company investment ratings based on the relative return expected in the following six months, based on the closing price on the date of rating declaration. • BUY: Excess return of +15p or more • MARKETPERFORM (M.PERFORM): Excess return of between -15p and +15p • SELL: Excess return of -15p or less

Stock ratings distribution (April 1, 2018-March 31, 2019) Rating Count % of rating category BUY 140 89.17 MARKETPERFORM 17 10.83 SELL 0 0

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