YG Entertainment (122870 KQ) Potential of new artists and businesses has yet to be proven

Entertainment 2Q revenue up 34.2% YoY, operating profit up 36.5% YoY YG Entertainment’s 2Q revenue and operating profit grew 34.2% and 36.5% YoY to Results Comment W30.6bn and W5.5bn, respectively. Net profit climbed 56.5% YoY. Overall, 2Q results August 30, 2013 met expectations thanks to revenue recognition from Psy’s domestic concerts and G- Dragon’s concerts outside of Japan. In 3Q, we project YG Entertainment to deliver record-high earnings, backed by G-Dragon’s (Maintain) Buy Japan dome tour (320,000 attendees based on maximum seating capacity), Daesung’s Japan concerts (70,000 attendees based on maximum seating capacity), and new album releases by Target Price (12M, W) 59,500 2NE1 and Seungri. We forecast 3Q operating profit of W8bn on revenue of W40bn.

Share Price (08/29/13, W) 49,250 Boy band to debut via reality competition show; Big Bang set for 4Q dome tour YG Entertainment has not introduced a single new idol group following the debut of Expected Return 21% 2NE1 four years ago and Big Bang eight years ago. However, the entertainment firm plans to debut a new boy group through a reality program called WIN (set to premiere OP (13F, Wbn) 27 on August 23rd), which will feature eleven contestants competing in two teams. Consensus OP (13F, Wbn) 29 We revise down our 2013F and 2014F net profit by 7.2% and 12.3%, respectively. EPS Growth (13F, %) 28.6 Although revenue from Psy’s overseas concerts has not yet been reflected, we believe Market EPS Growth (13F, %) 22.4 2013 overseas concert revenue has been largely in line with expectations. We note that P/E (13F, x) 20.7 G-Dragon’s concerts have been attracting much larger-than-expected crowds. Market P/E (13F, x) 9.6 On the other hand, we expect a decline in overseas royalties from Japanese-language KOSDAQ 520.37 albums (released through local agents). We note that royalties from Japanese albums Market Cap (Wbn) 508 and digital music are one of the company’s most profitable sources of revenue. Shares Outstanding (mn) 10 Free Float (%) 58.2 Looking forward into 2014, we expect: 1) Chinese concerts to begin generating meaningful Foreign Ownership (%) 3.2 revenue, 2) a clearer picture of Psy’s overseas concert schedule to emerge, and 3) the firm’s Beta (12M) 0.93 pop group lineup to expand with the addition of a new girl group. However, we believe the 52-Week Low (W) 45,350 contribution of the company’s most profitable sources of income (such as overseas albums 52-Week High (W) 108,700 and domestic digital music) will be smaller than expected.

(%) 1M 6M 12M Lower TP to W59,500; Potential of new artists or Psy effect yet to be confirmed Absolute -12.1 -26.4 -19.5 We maintain Buy on YG Entertainment, but slash our target price by 30% to W59,500 Relative -12.5 -20.5 -18.4 (from W85,000), in light of downward adjustments to our 2013F and 2014F EPS. We Share price also believe the current stock price reflects a growth premium relative to other 220 KOSDAQ entertainment or media players, but we have yet to see any concrete evidence that 170 validates the potential of new artists or businesses.

120 YG Entertainment has initiated a number of new businesses: including 1): the launch of

70 YG Channel on China’s largest online video website Youku, together with Samsung 8/12 12/12 4/13 8/13 Electronics, 2) the opening of a hologram concert hall at Everland, and 3) a W5bn investment in Red Rover, a 3D animation company.

Daewoo Securities Co., Ltd. FY (Dec.) 12/10 12/11 12/12 12/13F 12/14F 12/15F Revenue (Wbn) 58 78 107 137 165 185 Internet/Game/Entertainment OP (Wbn) 14 18 22 27 32 35 Chang-kwean Kim OP Margin (%) 23.6 22.7 20.2 19.8 19.6 18.7 +822-768-4321 NP (Wbn) 10 13 19 25 29 31 [email protected] EPS (W) 1,289 1,663 1,849 2,378 2,838 3,045

ROE (%) 61.4 26.5 21.6 22.7 22.4 20.1 P/E (x) 0.0 22.1 33.3 20.7 17.4 16.2 P/B (x) 0.0 5.2 7.1 4.7 3.8 3.2 Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates

Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.

August 30, 2013 YG Entertainment

Table 1. Annual earnings (Wbn, %) 2007 2008 2009 2010 2011 2012 2013F Revenue 11.5 18.5 35.7 44.8 78.1 106.6 137.3 CD 2.0 5.9 6.5 7.3 9.6 11.9 13.5 Digital 3.4 3.3 6.8 5.8 7.3 8.8 12.1 Overseas 0.0 0.0 0.0 4.6 31.8 53.4 77.7 Management 4.2 5.0 17.2 21.0 25.5 25.3 28.3 Other 1.8 4.4 5.2 6.0 3.9 7.1 5.7 Revenue breakdown CD 17.8 31.6 18.2 16.4 12.3 11.2 9.8 Digital 29.9 17.7 19.0 13.0 9.3 8.3 8.8 Overseas 0.0 0.0 0.0 10.4 40.8 50.2 56.6 Management 36.9 26.9 48.3 47.0 32.6 23.8 20.6 Other 15.4 23.8 14.5 13.4 5.0 6.7 4.1 Operating profit 0.6 1.4 7.4 13.6 17.8 21.5 27.2 OP margin 5.2 7.5 20.7 30.4 22.7 20.1 19.8 Net profit 0.5 1.6 4.2 9.6 12.9 18.8 24.5 Net margin 4.4 8.6 11.7 21.5 16.6 17.6 17.9 YoY Revenue 61.3 92.7 25.4 74.5 36.4 28.8 CD 186.4 10.9 12.9 30.7 24.2 13.0 Digital -4.3 106.1 -14.3 25.9 20.5 37.5 Overseas 586.0 67.8 45.5 Management 17.4 246.5 22.0 21.3 -0.7 11.7 Other 149.2 17.7 15.6 -35.0 82.0 -20.2 Operating profit 132.2 433.6 83.9 30.7 20.9 26.9 Net profit 217.5 159.9 131.4 34.3 45.0 30.6 Notes: Figures are based on K-GAAP through 2010; 2011- figures are based on consolidated K-IFRS Source: Company data, KDB Daewoo Securities Research estimates

Table 2. Earnings forecast revisions (Wbn, W, %, %p) Previous Revised % chg. 2013F 2014F 2013F 2014F 2013F 2014F Revenue 129 165 137 165 6.4 -0.1 Operating profit 29 38 27 32 -5.9 -14.3 Pretax profit 35 44 33 39 -5.2 -12.5 Net profit 26 33 25 29 -7.2 -12.3 EPS (W) 2,559 3,237 2,378 2,838 -7.1 -12.3 OP margin 22.4 22.8 19.8 19.6 -2.6 -3.3 Net margin 20.5 20.2 17.8 17.8 -2.6 -2.5 Notes: All figures are based on consolidated K-IFRS; Net profit refers to net profit attributable to controlling interests Source: KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research 2 August 30, 2013 YG Entertainment

YG Entertainment (122870 KQ/Buy/TP: W59,500)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/12 12/13F 12/14F12/15F (Wbn) 12/12 12/13F 12/14F 12/15F Revenue 107 137 165185 Current Assets 92 111 136 161 Cost of Sales 65 81 96 106 Cash and Cash Equivalents 53 56 75 96 Gross Profit 42 56 69 79 AR & Other Receivables 13 17 20 23 SG&A Expenses 21 29 37 45 Inventories 4 6 7 7 Operating Profit (Adj) 22 27 32 35 Other Current Assets 4 5 6 7 Operating Profit 22 27 32 35 Non-Current Assets 26 36 43 50 Non-Operating Profit 3 6 6 7 Investments in Associates 3 9 15 21 Net Financial Income -2 -2 -2 -3 Property, Plant and Equipment 11 11 10 10 Net Gain from Inv in Associates 4 6 6 6 Intangible Assets 8 10 10 11 Pretax Profit 25 33 39 41 Total Assets 118 146 179 211 Income Tax 6 9 9 10 Current Liabilities 20 26 31 35 Profit from Continuing Operations 19 25 29 31 AP & Other Payables 12 15 18 20 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 0 0 0 0 Net Profit 19 25 29 31 Other Current Liabilities 8 10 13 14 Controlling Interests 19 25 29 31 Non-Current Liabilities 0 2 4 6 Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 0 0 0 0 Total Comprehensive Profit 18 24 29 31 Other Non-Current Liabilities 0 2 4 6 Controlling Interests 18 24 29 31 Total Liabilities 20 28 35 41 Non-Controlling Interests 0 0 0 0 Controlling Interests 97 119 144 170 EBITDA 24 30 3639 Capital Stock 5 5 5 5 FCF (Free Cash Flow) 4 16 23 25 Capital Surplus 47 47 47 47 EBITDA Margin (%) 22.8 22.2 22.0 21.0 Retained Earnings 45 66 91 118 Operating Profit Margin (%) 20.2 19.8 19.6 18.7 Non-Controlling Interests 0 0 0 0 Net Profit Margin (%) 17.6 17.9 17.8 17.0 Stockholders' Equity 97 119 144 170

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/12 12/13F 12/14F12/15F 12/12 12/13F 12/14F 12/15F Cash Flows from Op Activities 12 16 26 28 P/E (x) 33.3 20.7 17.4 16.2 Net Profit 25 27 29 31 P/CF (x) 28.9 18.3 15.3 14.3 Non-Cash Income and Expense 1 4 7 7 P/B (x) 7.1 4.7 3.8 3.2 Depreciation 1 1 1 1 EV/EBITDA (x) 23.2 14.0 11.2 9.9 Amortization 2 3 3 4 EPS (W) 1,849 2,378 2,838 3,045 Others -4 0 0 0 CFPS (W) 2,130 2,689 3,224 3,448 Chg in Working Capital -8 -5 -2 -1 BPS (W) 8,675 10,572 12,906 15,371 Chg in AR & Other Receivables -9 -4 -3 -2 DPS (W) 300 400 500 600 Chg in Inventories -2 -1 -1 -1 Payout ratio (%) 16.5 16.8 17.6 19.7 Chg in AP & Other Payables 6 1 3 2 Dividend Yield (%) 0.5 0.8 1.0 1.2 Income Tax Paid -6 -9 -9 -10 Revenue Growth (%) 36.4 28.8 20.2 12.0 Cash Flows from Inv Activities 3 -14 -2 -1 EBITDA Growth (%) 20.1 25.2 19.3 6.8 Chg in PP&E -6 -1 0 0 Operating Profit Growth (%) 20.9 26.9 18.7 7.1 Chg in Intangible Assets -4 -4 -4 -4 EPS Growth (%) 11.2 28.6 19.4 7.3 Chg in Financial Assets 9 -10 0 0 Accounts Receivable Turnover (x) 11.8 9.6 9.3 9.0 Others 4 2 23 Inventory Turnover (x) Cash Flows from Fin Activities 1 0 -4 -5 Accounts Payable Turnover (x) 89.6 62.0 60.1 58.2 Chg in Financial Liabilities 0 0 0 0 ROA (%) 18.1 18.6 18.0 16.1 Chg in Equity 1 0 0 0 ROE (%) 21.6 22.7 22.4 20.1 Dividends Paid 0 -3 -4 -5 ROIC (%) 94.3 80.6 85.7 87.8 Others 0 0 0 0 Liability to Equity Ratio (%) 20.6 23.1 24.3 24.1 Increase (Decrease) in Cash 16 3 20 21 Current Ratio (%) 462.3 432.5 441.3 467.0 Beginning Balance 37 53 56 75 Net Debt to Equity Ratio (%) Ending Balance 53 56 75 96 Interest Coverage Ratio (x) Source: Company data, KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research 3 August 30, 2013 YG Entertainment

APPENDIX 1

Important Disclosures & Disclaimers Disclosures (W) YG Entertainment As of the publication date, Daewoo Securities Co., Ltd and/or its affiliates do not have any special interest 120,000 with the subject company and do not own 1% or more of the subject company's shares outstanding. 100,000

80,000 60,000 40,000

20,000

0 9/11 2/12 8/12 2/13 8/13

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 Daewoo Securities, 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.

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 and regulations thereof. Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. Daewoo Securities Co., Ltd. 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. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of Daewoo Securities, the Analysts receive compensation that is impacted 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 Daewoo Securities Co., Ltd. except as otherwise stated herein.

Disclaimers This report is published by Daewoo Securities Co., Ltd. (“Daewoo”), a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith, but such information has not been independently verified and 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 Korean language. If this report is 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. Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. This report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. 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 and regulations or subject Daewoo and its affiliates to registration or licensing requirements in any jurisdiction should receive or make any use hereof. Information and opinions contained herein are subject to change without notice and 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 Daewoo. 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. 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. The price and value of the investments referred to in this report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur.

KDB Daewoo Securities Research 4 August 30, 2013 YG Entertainment

Distribution United Kingdom: This report is being distributed by Daewoo Securities (Europe) Ltd. in the United Kingdom only to (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”), and (ii) high net worth companies and other persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as “Relevant Persons”). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its contents. United States: This report is distributed in the U.S. by Daewoo Securities (America) Inc., a member of FINRA/SIPC, and is only intended for major institutional investors as defined in Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of 1934. All U.S. persons that receive this document by their acceptance thereof represent and warrant that they are a major institutional investor and have not received this report under any express or implied understanding that they will direct commission income to Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed herein should contact and place orders with Daewoo Securities (America) Inc., which accepts responsibility for the contents of this report in the U.S. The securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or sold in the U.S. or to U.S. persons absent registration or an applicable exemption from the registration requirements. Hong Kong: This document has been approved for distribution in Hong Kong by Daewoo Securities (Hong Kong) Ltd., which is regulated by the Hong Kong Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person. All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Daewoo or its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Daewoo and its affiliates to any registration or licensing requirement within such jurisdiction.

KDB Daewoo Securities International Network Daewoo Securities Co. Ltd. (Seoul) Daewoo Securities (Hong Kong) Ltd. Daewoo Securities (America) Inc. Head Office Two International Finance Centre 320 Park Avenue, 31st Fl. 34-3 Yeouido-dong, Yeongdeungpo-gu Suites 2005-2012 New York, NY 10022 Seoul 150-716 8 Finance Street, Central Korea Hong Kong United States Tel: 82-2-768-3026 Tel: 85-2-2514-1304 Tel: 1-212-407-1000

Daewoo Securities (Europe) Ltd. Daewoo Securities (Singapore) Pte. Ltd. Tokyo Representative Office Tower 42, Level 41 6 Battery Road, #11-01 7th Floor, Yusen Building 25 Old Broad Street Singapore, 049909 2-3-2 Marunouchi, Chiyoda-ku London EC2N 1HQ Tokyo 100-0005 United Kingdom Japan Tel: 44-20-7982-8016 Tel: 65-6671-9845 Tel: 81-3- 3211-5511

Beijing Representative Office Shanghai Representative Office Ho Chi Minh Representative Office Suite 2602, Twin Towers (East) Unit 13, 28th Floor, Hang Seng Bank Tower Centec Tower B-12 Jianguomenwai Avenue 1000 Lujiazui Ring Road 72-74 Nguyen Thi Minh Khai Street Chaoyang District, Beijing 100022 Pudong New Area, Shanghai 200120 Ward 6, District 3, Ho Chi Minh City China China Vietnam Tel: 86-10-6567-9699 Tel: 86-21-5013-6392 Tel: 84-8-3910-6000

KDB Daewoo Securities Research 5