YG Entertainment (122870 KQ ) Lineup is back, but concerts come to a halt Entertainment 1Q20 review: Widely anticipated weakness Company Report For 1Q20, YG Entertainment announced consolidated revenue of W52.8bn (-18.3% YoY; all growth figures hereafter are YoY) and an operating loss of W2.1bn (remaining in the red). Fewer artist May 14, 2020 activities and poor subsidiary earnings were mainly to blame for the quarterly loss. That said, the weakness stemming from the company’s artist void was widely anticipated. At the parent level, the company posted operating profit of W1.9bn (-33.2%). Elsewhere, losses from YG Plus (W2.2bn), YGX (dance academy), and YG Japan totaled W4bn. Looking at core (Downgrade) Trading Buy businesses, album/digital music sales and management revenue fell 12% and 15.2%, respectively. The company recorded 120,000 album sales and recognized concert income from WINNER’s Asia Target Price(12M, W) ▼ 36,000 tour and BLACKPINK’s Japan dome tour (partial). On the non-operating side, the company booked W4.5bn in valuation losses on securities (Tencent Music Entertainment, etc.). Share Price (05/13/20, W) 30,650 Lineup is back, but monetization faces challenges Expected Return 17% Big Bang has finally made its comeback. After a busy global schedule in 2H19, BLACKPINK looks ready to make its return. The new group Treasure’s debut also appears imminent. The active presence of five groups with the potential to attract arena-level attendance and the liquidation of loss-making businesses are all positives to the company. OP (20F, Wbn) 3 Consensus OP (20F, Wbn) 18 However, the COVID-19 outbreak has brought concerts to a complete halt, putting a break on the company’s artist monetization. Over the past five years, concerts (excluding those in Japan) EPS Growth (20F, %) - accounted for 13.9% of overall revenue. Further including royalties from Japanese concerts (17.2% Market EPS Growth (20F, %) 27.5 of revenue), which directly translate into profits, concerts represent a significant portion of the P/E (20F, x) 110.6 company’s revenue. Market P/E (20F, x) 13.0 KOSDAQ 691.53 Suspension of tours is worrying, given ties to album releases Because the biggest appeal of concerts is the “liveness” of the experience, we think technological Market Cap (Wbn) 558 advancements are unlikely to completely fill the gap. We thus believe entertainment agencies Shares Outstanding (mn) 18 need to focus on propping up other existing revenue sources (album/digital music/ TV Free Float (%) 65.7 appearances), while also taking steps that can boost the expected returns on concerts once Foreign Ownership (%) 15.8 things get back to normal. However, recent concerns over a second outbreak suggest the return Beta (12M) 0.80 of live concerts could be further pushed back. Given that new album releases are typically ti ed to 52-Week Low 19,450 tour schedules, uncertainties surrounding concerts could lead to a prolonged slump in album releases. As of now, Lady Gaga’s new album (which features BLACKPINK) will be released in May , 52-Week High 35,850 while Treasure’s debut album is set to come out in July. (%) 1M 6M 12M Downgrade to Trading Buy and cut TP to W36,000 Absolute 9.5 20.0 -8.6 Relative -5.5 14.8 -6.4 We cut our target price on YG Entertainment by 10% to W36,000, as we revised down our 2021F net profit by 10% in light of the uncertainties related to concerts. Due to the reduced upside 110 YG Entertainment KOSDAQ potential, we downgrade our rating to Trading Buy. 100 90 We continue to favor YG Entertainment over the other two major entertainment agencies, as we 80 believe the company stands to benefit the most from an improvement in Korea-China relations, 70 given Big Bang/BLACKPINK’s significant presence in China (as demonstrated by recent ads and TV appearances). We are also bullish on the company’s expanding lineup and potential for success in 60 North America (through partnerships and YouTube). For these reasons, we believe the company 50 5.19 9.19 1.20 5.20 merits a higher valuation. That said, the delays in earnings improvement due to COVID-19 are a concern. We recommend taking a trading approach, paying attention to both potential improvements in Korea-China relations and risks of a second wave of infections. Mirae Asset Daewoo Co., Ltd. [ Media ] FY (12) 12/16 12/17 12/18 12/19 12/20F 12/21F Revenue (Wbn) 322 350 269 264 237 311 Jeong -yeob Park +822 -3774 -1652 OP (Wbn) 32 24 20 1 3 31 [email protected] OP Margin (%) 9.9 6.9 7.4 0.4 1.3 10.0 NP (Wbn) 19 18 18 -22 5 26 EPS (W) 1,094 931 911 -1,118 277 1,435 ROE (%) 7.7 5.7 5.1 -6.2 1.5 7.4 P/E (x) 25.9 31.0 52.2 - 110.6 21.4 P/B (x) 1.8 1.6 2.6 1.5 1.6 1.5 Dividend Yield (%) 0.7 0.5 0.3 0.0 0.0 0.0 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, 2020 YG Entertainment Table 1. Valuation (Wbn) Valuation - P/E 21F Fair market cap 654 Net profit 26 Base year change Target P/E 25.0 (2020F 2021F) Fair price (W) 36,000 17.5% upside Source: Mirae Asset Daewoo Research Table 2. Quarterly and annual earnings (Wbn, %, mn tickets, %p) 1Q19 2Q19 3Q19 4Q19 1Q20P 2Q20F 3Q20F 4Q20F 2018 2019 2020F Revenue 65 78 64 58 53 47 59 77 269 264 237 Products 19 26 23 22 17 20 25 26 101 90 88 Management 43 50 38 43 36 27 34 52 185 175 149 Gross profit 17.3 22.5 18.1 22.5 17.3 16.2 19.8 25.0 90 80 78 Operating profit -2.7 -0.1 -3.2 6.9 -2.1 -2.3 0.9 6.3 20 1 3 OP margin (%) -4.4 -0.1 -5.2 11.9 -4.0 -4.9 1.6 8.1 7.4 0.3 1.2 Pretax profit 14.3 -9.3 -7.7 0.6 -5.7 -0.3 2.9 8.3 37 -2 5 Net profit 7.3 -6.4 -6.4 -19.2 -8.9 -0.3 2.6 7.4 16 -25 1 Net margin (%) 11.3 -8.1 -10.0 -33.2 -16.8 -0.7 4.5 9.6 5.9 -9.3 0.4 Net profit attributable to controlling interests 8.4 -6.1 -4.8 -19.0 -4.2 -0.3 2.5 7.1 17.8 -21.5 5.0 YoY Revenue -16.3 24.5 -2.3 -9.1 -18.3 -39.3 -7.3 33.4 -23.1 -1.7 -10.5 Products -2.9 -0.9 -22.6 -14.4 -12.0 -20.0 7.7 17.3 -23.9 -11.2 -2.0 Management -26.1 36.0 9.1 -20.9 -15.2 -46.3 -11.5 18.7 -14.9 -5.5 -14.9 Gross profit -15.4 3.4 -16.1 -14.4 -0.1 -27.9 9.9 11.1 -10.6 -10.7 -2.5 Operating profit TTR TTR TTR -50.0 TTR TTR TTB -9.5 -18.0 -95.5 213.2 Net profit 837.0 TTR TTR TTR TTR TTR TTB TTB 33.9 TTR TTB Major assumptions Japanese concert ticket sales volume 0.1 0.0 0.2 0.1 0.2 0.0 0.0 0.8 0.4 0.4 1.0 Source: Company data, Mirae Asset Daewoo Research Figure 1. G-Dragon (Big Bang) filmed a TV commercial in Figure 2. Lisa (BLACKPINK) working as a dance mentor on a China Chinese audition reality show Source: Press materials, Mirae Asset Daewoo Research Source: Press materials, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 2 May 14, 2020 YG Entertainment Figure 3. Live Nation shares have yet to bounce back (US$) 80 Share price (adj.) 70 60 50 40 30 20 10 0 1/19 2/19 3/19 4/19 5/19 6/19 7/19 8/19 9/19 10/19 11/19 12/19 1/20 2/20 3/20 4/20 5/20 Source: Bloomberg, Mirae Asset Daewoo Research Figure 4. YouTube views by label: View count sluggish amid reduced new album releases (mn views) 800 SM (SMTOWN) JYP (jypentertainment + TWICE) YG (YG ENTERTAINMENT + BLACKPINK + iKON + WINNER) New BTS album 600 Big Hit (Big Hit Labels + BANGTANTV) 400 200 0 9/15 1/16 5/16 9/16 1/17 5/17 9/17 1/18 5/18 9/18 1/19 5/19 9/19 1/20 Source: Mirae Asset Daewoo Research Figure 5. YouTube channel subscriptions by label: Global growth continues (mn persons) 80 SM (SMTOWN) JYP (jypentertainment + TWICE) 70 YG (YG ENTERTAINMENT + BLACKPINK + iKON + WINNER) 60 Big Hit (Big Hit Labels + BANGTANTV) 50 40 30 20 10 0 9/15 1/16 5/16 9/16 1/17 5/17 9/17 1/18 5/18 9/18 1/19 5/19 9/19 1/20 Source: Mirae Asset Daewoo Research Mirae Asset Daewoo Research 3 May 14, 2020 YG Entertainment YG Entertainment (122870 KQ/Trading Buy/TP: W36,000) Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/18 12/19 12/20F 12/21F (Wbn) 12/18 12/19 12/20F 12/21F Revenue 269 264 237 311 Current Assets 233 160 170 206 Cost of Sales 179 184 158 202 Cash and Cash Equivalents 59 48 36 47 Gross Profit 90 80 79 109 AR & Other Receivables 30 19 25 32 SG&A Expenses 70 80 76 78 Inventories 23 16 21 28 Operating Profit (Adj) 20 1 3 31 Other Current Assets 121 77 88 99 Operating Profit 20 1 3 31 Non-Current Assets 362 356 371 394 Non-Operating Profit 17 -3 2 5 Investments in Associates 24 23 30 40 Net Financial Income 5 2 -1 -1 Property, Plant and Equipment 105 149 140 132 Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 61 52 50 48 Pretax Profit 37 -2 5 36 Total Assets 594 516 541 600 Income Tax 12 12 4 9 Current Liabilities 63 77 102 133 Profit from Continuing Operations 25 -14 1 27 AP & Other Payables 32 33 44 58 Profit from Discontinued Operations -9 -11 0 0 Short-Term Financial Liabilities 3 13 17 22 Net Profit 16 -25 1 27 Other Current Liabilities 28 31 41 53 Controlling Interests 18 -22 5 26 Non-Current Liabilities 82 18 18 19 Non-Controlling Interests -2 -3 -4 1 Long-Term Financial Liabilities 80 17 17 17 Total Comprehensive Profit 17 -24 1 27 Other Non-Current Liabilities 2 1 1 2 Controlling Interests 19 -21 1 27 Total Liabilities 145 95 120 152 Non-Controlling Interests -2 -3 0 0 Controlling Interests 359 337 340 367 EBITDA 28 19 14 41 Capital Stock 9 9 9 9 FCF (Free Cash Flow) -1 19 13 39 Capital Surplus 209 210 210 210 EBITDA Margin (%) 10.4 7.2 5.9 13.2 Retained Earnings 140 115 120 146 Operating Profit Margin (%) 7.4 0.4 1.3 10.0 Non-Controlling Interests 90 85 81 82 Net Profit Margin (%) 6.7 -8.3 2.1 8.4 Stockholders' Equity 449 422 421 449 Cash Flows (Summarized)