YG Entertainment (122870 KQ ) Turning Negatives Into Positives

YG Entertainment (122870 KQ ) Turning negatives into positives

2Q18 review: Still in the black Entertainment For 2Q18, YG Entertainment reported consolidated revenue of W62.7bn (-13.2% YoY) and operating profit of W1.4bn (-67.6% YoY), remaining in the black despite worries over a possible Results Comment loss. In entertainment content production, losses sequentially declined, and consolidated August 13, 2018 subsidiary YG Plus turned a profit (albeit a small one) for the first time in 14 quarters. Core business results were weak in 2Q18, as was expected given that it was the first quarter

of Big Bang’s absence. Notably, concert revenue recognized only proceeds from small-scale concerts in Korea and royalties from performer Daesung’s solo small-venue tour in Japan. (Upgrade) Buy The entertainment content production business (“The Icon TV”) remained in the red, but the extent of losses declined to W2.3bn in 2Q18 (vs. -W4bn in 4Q17 and -W3.8bn in 1Q18) . Target Price (12M, W) 43,000 Meanwhile, earnings at YG Plus improved thanks to: 1) the joint music business with NAVER (035420 KS/Buy/TP: W1,000,000/CP: W771,000; e.g., music service through VIBE); and 2) Share Price (08/10/18, W) 35,000 fixed-cost reductions for the cosmetics brand Moonshot (reducing its domestic footprint from three stores to one). Expected Return 23% Turning negatives into positives

There are several reasons for the poor performance of YG Entertainment’s shares from OP (18F, Wbn) 8 2016 to 1H18. 1) For an extended period, there was low visibility on the debut/comeback Consensus OP (18F, Wbn) 12 and concert schedules of the new generation of artists (iKON, BLACKPINK, and WINNER). 2) In addition, the company’s diversification into the dining, fashion, and cosmetics businesses EPS Growth (18F, %) -63.0 led to a higher cost burden. 3) Finally, the void left by Big Bang—YG Entertainment’s biggest Market EPS Growth (18F, %) 10.2 earnings driver—added to concerns. P/E (18F, x) 101.7 Market P/E (18F, x) 9.0 However, recent developments make us believe the negatives are turning into KOSDAQ 784.81 positives, and we believe the more favorable atmosphere will persist for over a year. 1) Visible growth in next-generation lineup: Korean artists, especially those signed by YG Market Cap (Wbn) 636 Entertainment, are making fast advances in Japan. It has taken two years less for iKON and Shares Outstanding (mn) 20 BLACKPINK to land dome concerts in Japan compared to previous dom estic groups (which Free Float (%) 62.7 usually held Japan dome concerts four to five years after their debuts). In addition, iKON, Foreign Ownership (%) 15.0 BLACKPINK, and WINNER, which are less than five years old, have relatively low profit- Beta (12M) 0.59 sharing ratios. As such, the rapid growth of these groups prior to their contract renewals 52-Week Low 24,850 should prove favorable to profitability, at least for the next three years. With global tours 52-Week High 41,750 kicking off from August, we expect the fan bases of these three groups to continue to grow. (%) 1M 6M 12M 2) Improvement in new businesses: The cosmetics business has reduced losses by scaling Absolute -10.5 22.8 25.4 back on domestic operations. For the content production business, cumulative losses Relative -7.2 31.8 2.3 amounted to W10bn from 4Q17 to 2Q18, but the extent of losses has likewise declined. Going forward, the content busines s is likely to favor new platforms that guarantee a fixed

150 YG Entertainment KOSDAQ margin, such as Netflix [NFLX US/CP: US$345.87], over less profitable conventional 130 channels.

110 3) Big Bang’s solid fan base: Big Bang garnered the second-highest concert attendance in Japan in 2017 (after Sandaime J Soul Brothers). After completing military service, Big Bang is 90 likely to maintain its ticket-selling power, as was the case with TVXQ and Super Junior in 2H17. 70 8.17 12.17 4.18 8.18 Maintain TP of W43,000 and upgrade to Buy We maintain our target price of W43,000 on YG Entertainment , but upgrade our rating Mirae Asset Daewoo Co., Ltd. to Buy (from Trading Buy) in light of the stock’s increased upside potential. [ Media ] FY (Dec.) 12/14 12/15 12/16 12/17 12/18F 12/19F Revenue (Wbn) 156 193 322 350 269 290 Jeong -yeob Park +822 -3774 -1652 OP (Wbn) 22 22 32 24 8 29 [email protected] OP Margin (%) 14.1 11.4 9.9 6.9 3.0 10.0

NP (Wbn) 19 28 19 18 7 25 EPS (W) 1,290 1,700 1,094 931 344 1,271 ROE (%) 13.4 14.7 7.7 5.7 2.0 7.0

P/E (x) 34.3 26.2 25.9 31.0 101.7 27.5 P/B (x) 4.1 3.6 1.8 1.6 2.0 1.8 Dividend Yield (%) 0.6 0.8 0.7 0.5 0.4 0.4 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

August 13, 2018 YG Entertainment

3Q18 preview: New artists embarking on Asia and Japan tours

iKON plans to tour Asia beginning on August 18 th following their new album release. The tour will include 13 performances in Japan (including two dome concerts; total attendance of 200,000) and stops in eight cities outside of Japan.

BLACKPINK is launching its Japan tour next week. Not only is the size of the tour bigger than expected (seven performances; 80,000 attendees), but the group also confirmed a Kyocera Dome (Osaka) performance later this year, just 15 months after its debut in Japan.

WINNER is embarking on an Asia tour on August 19 th , visiting at least eight cities. The group is also set to release a new album this summer.

Table 1. Quarterly and annual earnings (Wbn, %, mn)

1Q17 2Q17 3Q17 4Q17 1Q18 2Q18P 3Q18F 4Q18F 2017 2018F 2019F Revenue 107 72 75 95 77 63 58 71 350 269 290 Products 27 32 24 50 20 26 20 22 133 88 91 Albums 5 7 4 2 2 3 4 3 18 13 13 Digital content 13 16 12 14 11 13 12 11 55 47 49 Goods, etc. 8 9 8 34 6 9 5 7 59 28 28 Management 80 41 51 45 58 37 38 49 217 182 199 Concerts 13 7 21 15 2 1 4 9 56 16 30 Advertising 9 12 10 8 7 8 7 5 40 27 27 Royalties 49 6 5 1 35 5 5 12 62 56 49 Appearance fees 5 4 5 6 3 5 7 5 20 20 23 Commissions 4 11 9 11 8 18 14 16 35 55 61 Production 0 0 0 4 3 0 3 3 4 9 10 Gross profit 33 25 21 22 20 22 18 23 101 84 105 Operating profit 15 4 1 5 2 1 0 5 25 8 29 OP margin (%) 13.9 6.0 2.0 4.8 3.0 2.2 -0.7 7.2 7.2 3.2 10.0 Pretax profit 14 6 8 3 3 2 1 4 30 10 30 Net profit 6 5 5 -4 1 0 1 3 12 4 21 Net margin (%) 5.6 6.6 7.1 -4.3 1.0 -0.6 1.7 3.8 3.4 1.5 7.1 Net profit (controlling) 7 4 6 0 2 0 1 3 17.8 6.7 24.8 YoY Revenue 46.5 -6.5 -25.7 35.8 -27.7 -13.2 -22.8 -25.6 8.7 -23.1 7.8 Products 43.9 46.5 -0.9 91.9 -26.3 -18.6 -16.0 -56.3 46.4 -34.0 4.0 Management 47.4 -27.1 -33.6 2.6 -28.0 -9.0 -26.0 8.5 -6.0 -16.4 9.6 Gross profit 42.2 7.1 -27.5 10.6 -37.8 -11.9 -11.7 4.8 6.0 -16.7 25.4 Operating profit 56.3 -36.1 -87.8 30.0 -84.4 -67.6 TTR 12.3 -21.0 -66.4 241.1 Net profit -6.8 -27.8 133.7 RR -87.0 TTR -80.9 TTB -15.5 -65.4 402.5 Key assumption Ticket sales volume in Japan 0.1 0.5 0.5 0.8 0.1 0.0 0.2 0.2 1.9 0.5 1.0 Notes: All figures are based on consolidated K-IFRS; ticket sales volume is based on the actual timing of concerts and includes our estimates. Source: Company data, Mirae Asset Daewoo Research estimates

Table 2. Earnings forecast revisions (Wbn, %, %p) Previous Revised Change Note 18F 19F 18F 19F 18F 19F Revenue 267 282 269 290 1.0 2.9 Reflected updated concert/event schedule Operating profit 11 28 8 29 -22.2 3.4 Net profit 11 26 7 25 -41.1 -3.3 OP margin 4.1 9.9 3.2 10.0 -0.9 0.1

Net margin 4.3 9.1 2.5 8.6 -1.8 -0.5 Notes: All figures are based on consolidated K-IFRS; net profit is attributable to controlling interests. Source: Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 2 August 13, 2018 YG Entertainment

Figure 1. Lower average age at debut is positive for profitability

(%) 72 COGS ratio

60 2015 2016 2017 2018F 2019F

Source: Company data, Mirae Asset Daewoo Research

Figure 2. Comparison of profitability by concert venue size and artist contract status

(%) 25 Dome/stadium Arena/hall

0 Debut contract Renewed contract

Source: Company data, Mirae Asset Daewoo Research

Figure 3. Pace at which Korean artists are reaching dome tour status is accelerating

(Mo.) No. of months between domestic debut and first dome concert 100 No. of months between Japanese debut and first dome concert

0 TVXQ Big Bang Kara Girls' SHINee EXO BTS iKON BLACKPINK Generation

Source: Press reports, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 3 August 13, 2018 YG Entertainment

Figure 4. Japan concert attendance likely to sharply recover after 2018-19 decline

(mn) 2.8 YG Family BLACKPINK 2.4 iKON WINNER 2.0 Epik High 2NE1 1.6 Psy Big Bang 1.2

0.8

0.4

0.0 2012 2013 2014 2015 2016 2017 2018F 2019F 2020F Note: Based on actual timing of concerts and venue capacity Source: Company data , Mirae Asset Daewoo Research

Figure 5. YG Data Room (produced in-house) to premiere on Netflix starting in September

Source: Company materials, Mirae Asset Daewoo Research

Figure 64. 24-month forward P/E band

(W) 70,000 60x 45x

50,000 30x

21x 30,000

10,000 1/14 7/14 1/15 7/15 1/16 7/16 1/17 7/17 1/18 7/18

Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 4 August 13, 2018 YG Entertainment

YG Entertainment (122870 KQ/Buy/TP: W43,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/16 12/17 12/18F 12/19F (Wbn) 12/16 12/17 12/18F 12/19F Revenue 322 350 269 290 Current Assets 276 307 323 346 Cost of Sales 227 249 185 185 Cash and Cash Equivalents 62 99 168 180 Gross Profit 95 101 84 105 AR & Other Receivables 29 40 29 32 SG&A Expenses 63 77 75 76 Inventories 16 18 14 15 Operating Profit (Adj) 32 24 8 29 Other Current Assets 169 150 112 119 Operating Profit 32 24 8 29 Non-Current Assets 210 276 245 243 Non-Operating Profit 1 6 2 1 Investments in Associates 14 14 11 11 Net Financial Income 4 7 6 7 Property, Plant and Equipment 61 87 88 84 Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 33 63 60 56 Pretax Profit 33 30 10 30 Total Assets 487 584 568 589 Income Tax 19 18 6 9 Current Liabilities 68 73 57 60 Profit from Continuing Operations 14 12 4 21 AP & Other Payables 32 47 35 38 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 0 2 3 3 Net Profit 14 12 4 21 Other Current Liabilities 36 24 19 19 Controlling Interests 19 18 7 25 Non-Current Liabilities 68 78 80 81 Non-Controlling Interests -5 -6 -3 -4 Long-Term Financial Liabilities 67 75 78 78 Total Comprehensive Profit 19 6 5 21 Other Non-Current Liabilities 1 3 2 3 Controlling Interests 22 13 10 44 Total Liabilities 136 151 137 141 Non-Controlling Interests -4 -7 -5 -23 Controlling Interests 281 343 345 367 EBITDA 39 34 18 37 Capital Stock 8 9 9 9 FCF (Free Cash Flow) 14 -8 9 28 Capital Surplus 160 209 209 209 EBITDA Margin (%) 12.1 9.7 6.7 12.8 Retained Earnings 110 124 125 147 Operating Profit Margin (%) 9.9 6.9 3.0 10.0 Non-Controlling Interests 69 89 86 82 Net Profit Margin (%) 5.9 5.1 2.6 8.6 Stockholders' Equity 350 432 431 449

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/16 12/17 12/18F 12/19F 12/16 12/17 12/18F 12/19F Cash Flows from Op Activities 32 22 16 28 P/E (x) 25.9 31.0 101.7 27.5 Net Profit 14 12 4 21 P/CF (x) 11.0 12.9 47.3 22.5 Non-Cash Income and Expense 30 31 10 10 P/B (x) 1.8 1.6 2.0 1.8 Depreciation 3 4 4 4 EV/EBITDA (x) 10.3 13.8 31.0 14.3 Amortization 4 6 5 4 EPS (W) 1,094 931 344 1,271 Others 23 21 1 2 CFPS (W) 2,570 2,245 740 1,558 Chg in Working Capital 7 -7 4 -1 BPS (W) 16,007 17,816 17,887 19,020 Chg in AR & Other Receivables -5 -13 11 -2 DPS (W) 200 150 150 150 Chg in Inventories -4 -4 5 -1 Payout ratio (%) 23.2 22.7 64.7 13.1 Chg in AP & Other Payables 12 15 -6 1 Dividend Yield (%) 0.7 0.5 0.4 0.4 Income Tax Paid -24 -22 -10 -9 Revenue Growth (%) 66.8 8.7 -23.1 7.8 Cash Flows from Inv Activities -68 -54 48 -12 EBITDA Growth (%) 50.0 -12.8 -47.1 105.6 Chg in PP&E -18 -30 -7 0 Operating Profit Growth (%) 45.5 -25.0 -66.7 262.5 Chg in Intangible Assets -2 -5 -1 0 EPS Growth (%) -35.6 -14.9 -63.1 269.5 Chg in Financial Assets -52 11 57 -12 Accounts Receivable Turnover (x) 13.0 10.7 8.2 10.0 Others 4 -30 -1 0 Inventory Turnover (x) 20.5 20.1 16.7 20.4 Cash Flows from Fin Activities 63 71 0 -3 Accounts Payable Turnover (x) 30.8 22.7 18.1 20.4 Chg in Financial Liabilities 4 10 5 0 ROA (%) 3.3 2.2 0.7 3.6 Chg in Equity 64 50 0 0 ROE (%) 7.7 5.7 2.0 7.0 Dividends Paid -6 -4 -4 -3 ROIC (%) 13.7 7.1 1.6 12.9 Others 1 15 -1 0 Liability to Equity Ratio (%) 38.9 35.1 31.8 31.4 Increase (Decrease) in Cash 28 37 69 12 Current Ratio (%) 404.8 419.4 570.2 573.0 Beginning Balance 34 62 99 168 Net Debt to Equity Ratio (%) -38.1 -32.8 -40.7 -43.3 Ending Balance 62 99 168 180 Interest Coverage Ratio (x) 21.4 14.0 4.1 14.0 Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 5 August 13, 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) 08/12/2018 Buy 43,000 50,000 07/22/2018 Trading Buy 43,000 40,000 05/13/2018 Trading Buy 30,000 02/22/2018 Trading Buy 32,000 30,000 12/05/2017 Buy 39,000 20,000 09/05/2017 Buy 35,000 01/02/2017 No Coverage 10,000

11/09/2016 Buy 36,000 0 08/11/2016 Buy 45,000 Aug 16 Aug 17 Aug 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 73.40% 14.78% 11.82% 0.00% Investment Banking Services 77.42% 9.68% 12.90% 0.00% * Based on recommendations in the last 12-months (as of June 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 Korea Exchange. 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 Korean language. 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 6 August 13, 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 7 August 13, 2018 YG Entertainment

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