YG Entertainment

(122870 KQ ) Profit contribution of content production business to be delayed Entertainment 1Q18 review: Earnings disappoint our expectations and the consensus For 1Q18, YG Entertainment reported consolidated revenue of W77.3bn (-27.7% YoY; Results Comment all growth figures hereafter are YoY) and operating profit of W2.3bn (-84.4%), missing May 14, 2018 consensus estimates (W88.1bn and W9.1bn, respectively) and our expectations (W87.3bn and W8.5bn, respectively). There had been bullish expectations on the quarter, due to the anticipated recognition of Big Bang’s last tour prior to the military enlistment of key members. However, the entertainment content production business (which posted a loss of W4bn in 4Q17) weighed on earnings , posting another loss of (Maintain) Trading Buy W3.8bn (versus our original expectation of breakeven). For Japan concerts, the company recognized revenue from Big Bang’ s dome tour (650,000 attendees) and a portion of iKON’s 2H17 tour (100,000 attendees). Concert Target Price (12M, W) ▼ 30,000 attendees fell by 15% (following a record quarter in 1Q17), resulting in a 30% decline in royalties; that said, the decline was broadly within expectations. Album revenue was Share Price (05/11/18, W) 27,350 also lackluster, aside from iKON’s new comeback album released in February (100,000 copies sold). Meanwhile, YG Entertainment appears to be maintaining a tight grip on the music streaming market, supported by new album releases by iKON (Febru ary) Expected Return 10% and WINNER (April) and a new single by Big Bang. Top line should shrink, but profitability should improve OP (18F, Wbn) 21 Revenue will inevitably decline from 2Q18, due to the void left by Big Bang. From 2014 Consensus OP (18F, Wbn) 27 to 2017, the group was responsible for 82%, 87%, 84%, and 70% of total concert attendees (based on Japan concerts), respectively, and 40%, 73%, 50%, and 48% of EPS Growth (18F, %) 4.6 domestic album sales, respectively. As we have emphasized before, the company’s transition to a new generation of artists—iKON, , and WINNER—bears close Market EPS Growth (18F, %) 16.3 watching. The three groups, which are entering their fourth, third, and fifth years after P/E (18F, x) 28.1 their respective debuts, have lower profit sharing ratios than Big Bang (13 years ). As Market P/E (18F, x) 9.5 such, the growth of these groups is positive for profitability. KOSDAQ 865.93 We believe the three groups are basically doing well. iKON has two dome concerts (200,000 attendees) scheduled, which are similar to the group’s 2H17 concerts in size . Market Cap (Wbn) 497 BLACKPINK is about to embark on a bigger-than-expected Japan arena tour in July (s ix Shares Outstanding (mn) 20 performances, 66,000 attendees). WINNER, which wrapped up its Japan tour (11 performances, 80,000 attendees) in April, is now getting ready to launch an arena tour. Free Float (%) 62.7 We expect the three acts’ 2018 Japanese concert ticket sales to be around 37% of Big Foreign Ownership (%) 15.6 Bang’s 2017 figure (1.44mn). Beta (12M) 0.76 52-Week Low 24,850 Profit contribution of content production business to be delayed 52-Week High 36,150 While it is meaningful that YG Entertainment has finally launched its content production business, after working hard to recruit production talent, profit (%) 1M 6M 12M contribution looks likely to take longer than expected. During 4Q17 and 1Q18, in- Absolute -11.1 -9.7 -19.6 house-produced entertainment shows Mix Nine and Do the Right Thing were aired on JTBC (BLACKPINK House is a web-based show). Losses incurred during the two Relative -9.1 -24.9 -39.8 quarters totaled W8bn, close to the shows’ production budgets, which we attribute to the company’s unfavorable contract terms (being new to the business) and the shows’

170 YG Entertainment KOSDAQ weak ratings. That said, two new series—iKON TV and YG Future Strategy Office , which 150 will air on the web and , respectively—are unlikely to generate significant losses ,

130 given the nature of their platforms. 110 Maintain Trading Buy and lower TP to W30,000 90 We maintain our Trading Buy call on YG Entertainment and lower our target price by 70 6.3% to W30,000, based on 27x our 2018F EPS. Top-line contraction has now become a 5.17 9.17 1.18 5.18 reality. Looking ahead, the key points to watch are the expected improvement in margins, next-generation artist lineup, decline in subsidiary losses, and normalization in . Mirae Asset Daewoo Co., Ltd.

[ Media ] FY (12) 12/14 12/15 12/16 12/17 12/18F 12/19F Revenue (Wbn) 156 193 322 350 285 273 -yeob Park +822 -3774 -1652 OP (Wbn) 22 22 32 24 21 26 [email protected] OP margin (%) 14.1 11.4 9.9 6.9 7.4 9.5

NP (Wbn) 19 28 19 18 19 23 EPS (W) 1,290 1,700 1,094 931 974 1,201 ROE (%) 13.4 14.7 7.7 5.7 5.4 6.4

P/E (x) 34.3 26.2 25.9 31.0 28.1 22.8 P/B (x) 4.1 3.6 1.8 1.6 1.5 1.4 Dividend yield (%) 0.6 0.8 0.7 0.5 0.5 0.5 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

May 14, 2018 YG Entertainment

Table 1. Target price calculation (Wbn, x) Valuation - P/E 2018 F Target market cap 539 Net profit attributable to controlling interests 20 Target P/E 27.0 Target price (W) 30,000 Upside potential (%) 10 Source: Mirae Asset Daewoo Research estimates

Table 2. Quarterly and annual earnings (Wbn, %, mn) 1Q17 2Q17 3Q17 4Q17 1Q18P 2Q18F 3Q18F 4Q18F 2017 2018F 2019F Revenue 107 72 75 95 77 70 64 73 350 285 273 Products 27 32 24 28 19 24 22 21 110 86 90 Albums 5 7 4 2 2 3 3 3 17 12 13 Digital content 13 16 12 14 11 13 12 11 55 48 49 Goods, etc. 8 9 8 12 6 7 6 7 38 26 28 Management 80 41 51 64 58 47 43 51 236 199 183 Concerts 13 7 21 15 2 8 10 8 56 29 32 Advertising 9 12 10 8 7 12 10 8 40 37 38 Royalties 49 6 5 23 35 8 4 18 84 65 40 Appearance fees 5 4 5 6 3 7 7 6 20 23 26 Commissions 4 11 9 11 8 9 9 9 36 34 37 Production 0 0 0 4 3 3 3 3 4 11 10 Gross profit 33 25 21 22 20 25 24 26 101 96 100 Operating profit 15 4 1 5 2 6 5 8 25 21 26 OP margin (%) 13.9 6.0 2.0 5.0 3.0 8.1 7.9 11.1 7.2 7.4 9.5 Pretax profit 14 6 8 3 3 7 7 7 30 24 28 Net profit 6 5 5 -4 1 5 5 5 12 16 20 Net margin (%) 5.6 6.6 7.1 -4.3 1.0 7.3 7.5 6.6 3.4 5.4 7.2 Net profit attributable to 7 4 6 0 2 6 6 6 17.8 20.0 23.5 controlling interests YoY Revenue 46.5 -6.5 -25.7 35.8 -27.7 -2.9 -14.4 -23.7 8.7 -18.6 -3.9 Products 43.9 46.5 -0.9 6.7 -26.9 -25.9 -9.9 -23.2 21.8 -22.0 5.1 Management 47.4 -27.1 -33.6 44.2 -28.0 15.2 -16.6 -19.2 1.9 -15.7 -7.9 Gross profit 42.2 7.1 -27.5 10.6 -37.8 1.3 14.4 18.0 6.0 -5.1 5.0 Operating profit 56.3 -36.1 -87.8 30.0 -84.4 30.6 242.2 76.4 -21.0 -16.3 22.5 Net profit -6.8 -27.8 133.7 RR -87.0 8.3 -9.5 TTB -15.5 30.2 26.1 Key assumption Ticket sales volume in Japan 0.1 0.4 0.5 0.8 0.1 0.0 0.4 0.2 1.8 0.7 0.7 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 Notes 18F 19F 18F 19F 18F 19F Revenue 329 315 285 273 -13.5 -13.2 Reflected 1Q18 results and updated concert schedule Operating profit 24 23 21 26 -12.8 10.6 Lowered gross margin of content production business Net profit 20 20 20 23 -1.8 19.1 Revised tax rate OP margin 7.2 7.4 7.4 9.5 0.2 2.1

Net margin 3.4 5.8 7.0 8.6 3.6 2.8 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 May 14, 2018 YG Entertainment

Figure 1. P/E band

(W) 60,000 Price (adj.)

50,000

40,000

42x 30,000 35x

29x 20,000 23x

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

Figure 2. Japan concert attendees likely to decline; focus on Figure 3. Lowering artists’ age of debut is positive for transition to a new generation of artists profitability

(mn persons) (%) 2.0 YG Family 72 Gross profit margin BLACKPINK iKON 70 1.6 WINNER 2NE1 68 1.2 Big Bang 66 0.8 64

0.4 62

0.0 60 2012 2013 2014 2015 2016 2017 2018F 2012 2013 2014 2015 2016 2017 2018F 2019F

Note: Based on actual timing of concerts and venue size Source: Company data, Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research

Figure 4. Music streaming market share stayed solid through Figure 5. YG Future Strategy Office to air on Netflix in 2H April

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

Mirae Asset Daewoo Research 3 May 14, 2018 YG Entertainment

YG Entertainment (122870 KQ/Trading Buy/TP: W30,000)

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 322 350 285 273 Current Assets 276 307 356 388 Cost of Sales 227 249 189 173 Cash and Cash Equivalents 62 99 197 245 Gross Profit 95 101 96 100 AR & Other Receivables 29 40 30 27 SG&A Expenses 63 77 74 74 Inventories 16 18 14 13 Operating Profit (Adj) 32 24 21 26 Other Current Assets 169 150 115 103 Operating Profit 32 24 21 26 Non-Current Assets 210 276 222 201 Non-Operating Profit 1 6 2 2 Investments in Associates 14 14 11 10 Net Financial Income 4 7 10 11 Property, Plant and Equipment 61 87 76 70 Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 33 63 48 41 Pretax Profit 33 30 23 28 Total Assets 487 584 578 589 Income Tax 19 18 8 8 Current Liabilities 68 73 56 51 Profit from Continuing Operations 14 12 15 20 AP & Other Payables 32 47 36 33 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 0 2 2 2 Net Profit 14 12 15 20 Other Current Liabilities 36 24 18 16 Controlling Interests 19 18 19 23 Non-Current Liabilities 68 78 78 77 Non-Controlling Interests -5 -6 -4 -4 Long-Term Financial Liabilities 67 75 75 75 Total Comprehensive Profit 19 6 15 20 Other Non-Current Liabilities 1 3 3 2 Controlling Interests 22 13 4 6 Total Liabilities 136 151 134 128 Non-Controlling Interests -4 -7 11 14 Controlling Interests 281 343 359 379 EBITDA 39 34 47 38 Capital Stock 8 9 9 9 FCF (Free Cash Flow) 14 -8 45 33 Capital Surplus 160 209 209 209 EBITDA Margin (%) 12.1 9.7 16.5 13.9 Retained Earnings 110 124 140 160 Operating Profit Margin (%) 9.9 6.9 7.4 9.5 Non-Controlling Interests 69 89 85 82 Net Profit Margin (%) 5.9 5.1 6.7 8.4 Stockholders' Equity 350 432 444 461

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 45 33 P/E (x) 25.9 31.0 28.1 22.8 Net Profit 14 12 15 20 P/CF (x) 11.0 12.9 13.7 18.4 Non-Cash Income and Expense 30 31 24 9 P/B (x) 1.8 1.6 1.5 1.4 Depreciation 3 4 11 5 EV/EBITDA (x) 10.3 13.8 7.9 8.6 Amortization 4 6 15 7 EPS (W) 1,094 931 974 1,201 Others 23 21 -2 -3 CFPS (W) 2,570 2,245 2,000 1,484 Chg in Working Capital 7 -7 3 1 BPS (W) 16,007 17,816 18,608 19,670 Chg in AR & Other Receivables -5 -13 9 3 DPS (W) 200 150 150 150 Chg in Inventories -4 -4 4 1 Payout ratio (%) 23.2 22.7 17.8 13.8 Chg in AP & Other Payables 12 15 -3 -1 Dividend Yield (%) 0.7 0.5 0.5 0.5 Income Tax Paid -24 -22 -8 -8 Revenue Growth (%) 66.8 8.7 -18.6 -4.2 Cash Flows from Inv Activities -68 -54 53 17 EBITDA Growth (%) 50.0 -12.8 38.2 -19.1 Chg in PP&E -18 -30 0 0 Operating Profit Growth (%) 45.5 -25.0 -12.5 23.8 Chg in Intangible Assets -2 -5 0 0 EPS Growth (%) -35.6 -14.9 4.6 23.3 Chg in Financial Assets -52 11 53 17 Accounts Receivable Turnover (x) 13.0 10.7 8.6 10.0 Others 4 -30 0 0 Inventory Turnover (x) 20.5 20.1 17.5 20.4 Cash Flows from Fin Activities 63 71 -4 -3 Accounts Payable Turnover (x) 30.8 22.7 18.2 20.3 Chg in Financial Liabilities 4 10 0 0 ROA (%) 3.3 2.2 2.6 3.4 Chg in Equity 64 50 0 0 ROE (%) 7.7 5.7 5.4 6.4 Dividends Paid -6 -4 -4 -3 ROIC (%) 13.7 7.1 9.1 13.9 Others 1 15 0 0 Liability to Equity Ratio (%) 38.9 35.1 30.2 27.9 Increase (Decrease) in Cash 28 37 98 48 Current Ratio (%) 404.8 419.4 631.2 761.3 Beginning Balance 34 62 99 196 Net Debt to Equity Ratio (%) -38.1 -32.8 -47.6 -54.3 Ending Balance 62 99 196 245 Interest Coverage Ratio (x) 21.4 14.0 10.4 12.8 Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 4 May 14, 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) 05/13/2018 Trading Buy 30,000 80,000 02/22/2018 Trading Buy 32,000 12/05/2017 Buy 39,000 60,000 09/05/2017 Buy 35,000 01/02/2017 No Coverage 40,000 11/09/2016 Buy 36,000 20,000 08/11/2016 Buy 45,000

05/12/2016 Buy 60,000 0 May 16 May 17 May 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 75.00% 11.11% 13.89% 0.00% Investment Banking Services 70.73% 19.51% 9.76% 0.00% * Based on recommendations in the last 12-months (as of March 31, 2018)

Disclosures As of the publication date, Mirae Asset Daewoo Co., Ltd. and/or its affiliates do not have any special interest with the subject 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 . 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 5 May 14, 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 6 May 14, 2018 YG Entertainment

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Mirae Asset Daewoo Research 7