Company Report May 14, 2019 YG Entertainment (122870 KS) Media/entertainment First consolidated operating loss since IPO 1Q19 review YG Entertainment posted consolidated sales of W64.7bn (-16% YoY), OP of -W2.3bn (turning to loss YoY), and net profit attributable to controlling interest (NPCI) of W8.4bn (+264% YoY). OP came far below consensus on: 1) losses from major subsidiaries (YG Plus, YG Entertainment Japan, etc.); 2) decreased GPM of the parent’s management business; and 3) increased loss from broadcast production. Meanwhile, the company saw a valuation gain of W1.3bn on its stake in Tencent Music Entertainment (TME). ▶ Parent: Earnings were sluggish, with sales of W41.7bn (-27% YoY) and OP of W900mn (-36% YoY). Digital music sales came to W14.7bn (+9% YoY), management W26.1bn (-36% YoY), and broadcast production W900mn (-74% YoY). 1) Digital music sales were solid on Rating BUY (M) strong overseas digital music sales on Apple Music and Spotify even though the firm released Target price W47,000 (D) no new music. YouTube views came to 1.35bn (+90% YoY, -7% QoQ). 2) The YoY decline in Current price (May 13) W33,550 management sales was due to base effect from the reflection of revenue from Big Bang’s Japanese activities in 2018. GPM came to 27%, 6~13%p lower than in 2Q18~4Q18, when Upside potential 40% there were no earnings from Big Bang, as actors’ share of total management sales rose. 3) Broadcast production posted a loss of W1.8bn, up W1.1bn QoQ. Broadcast production fixed Market cap (Wbn) 610 cost comes to W2.5bn per quarter. However, revenue from “YG Treasure Box” was minimal Shares outstanding 19,557,297 in 1Q19, resulting in more losses QoQ. ▶ YG Plus: Sales came to W24bn (+56% YoY) and Avg daily T/O (2M, Wbn) 17 OP -W1.4bn (turning to loss YoY). YG Plus reported 4Q18 OP of W1.2bn, raising expectations for quarterly profits going forward, but it suffered a double-digit operating loss again in 1Q19, Avg daily volume (2M, shrs) 432,659 as subsidiary Codecosme International (“Moonshot”) turned to a loss again. The subsidiary 52-week high (won) 48,950 reported its first-ever profit in 4Q18 on higher exports to China, but went back into the red, as 52-week low (won) 27,150 there were no exports in 1Q19. We expect YG Plus to enjoy strong earnings in 2Q19, as: 1) Foreign ownership (%) 16.7 the parent YG Plus’ music service revenue should improve QoQ thanks to BLACKPINK’s new Major shareholders (%) single; 2) Codecosme International’s exports will resume; and 3) YG Sports’ golf business will Hyeon-seok Ryang & others 21.2 generate robust earnings on seasonality. ▶ YG Entertainment Japan: OP came to W2.5bn in 1Q18 thanks to “Big Bang,” but turned to a small loss in 1Q19 on weak artist performance. Stock performance Japan’s dome tour artists to diversify in 2020 (%) 1M 3M 12M Absolute (11.0) (24.8) 22.7 We maintain BUY, but revise down our target price from W59,000 to W47,000, as we cut Relative (3.6) (21.5) 49.9 2020E EPS by 20% (based on target P/E 25x). We deferred some Big Bang-related profit from Abs (US$) (14.6) (28.9) 10.5 2020 to 2021, as dome tours are usually done from 4Q to 1Q. Earnings should rise sharply, as arena/dome artists in Japan diversify from from Big Bang (dome) to IKON (arena/dome) and BLACKPINK (dome). Quarterly earnings Forecasts and valuations (K-IFRS, consolidated) (Wbn) (Wbn) 1Q19P % YoY % QoQ Consens vs consens (%) FY ends Dec 2017A 2018A 2019E 2020E Sales 65 -16.3 -19.8 68 -5.6 Sales 350 286 295 457 OP -2 TTR TTR 3 -169.5 OP 25 9 12 52 Net profit, CI 18 18 17 34 Pre-tax net profit 14 391.3 -23.2 5 175.2 P/E (x) 29.6 36.2 36.5 18.1 Net profit, CI 8 263.7 -38.5 5 66.1 P/B (x) 1.7 1.9 1.7 1.6 OPM (%) -3.5 TTR TTR 4.7 -8.2 %pt EV/EBITDA (x) 13.2 39.2 26.5 9.2 NPM (%) 12.9 +9.9 %pt -4.0 %pt 7.4 +5.5 %pt ROE (%) 5.7 5.1 4.6 8.7 Source: Yuanta Securities YG Entertainment (122870 KS) YG Entertainment (122870 KS) pro forma financial statements (K-IFRS, consolidated) Statement of comprehensive income Statement of financial position FY ends Dec (Wbn) 2017A 2018A 2019E 2020E 2021E FY ends Dec (Wbn) 2017A 2018A 2019E 2020E 2021E Sales 350 286 295 457 505 Current assets 307 233 266 322 516 Cost of sales 249 201 208 320 353 Cash & cash equivalents 99 59 167 210 398 Gross profit 101 85 86 137 151 Accts rec & other 41 31 30 37 40 SG&A 77 75 74 85 89 Inventory 18 23 23 30 33 Operating profit 24 10 12 52 62 Non-current assets 276 362 352 352 226 EBITDA 35 19 23 64 74 Tangible assets 87 105 115 115 115 Non-op profit/loss 6 17 17 5 10 Investment in affiliates 14 24 24 24 24 Forex gain/loss 0 0 0 0 0 Other non-current 105 164 144 144 22 Net interest income 7 4 5 5 10 Total assets 584 594 617 674 742 Equity-meth gain/loss 0 0 0 0 0 Current liabilities 73 63 63 76 94 Other -1 12 12 0 0 Accts payable & other 55 37 37 40 47 Net prof before income tax 30 26 29 57 72 ST financial liabilities 2 3 4 15 25 Income tax 18 9 12 19 25 Liquid LT liabilities 0 0 0 0 0 Net profit from continuing ops 12 17 17 38 47 Non-current liabilities 78 82 82 82 82 Net profit from discontinued ops 0 -2 0 0 0 LT financial liabilities 4 7 7 7 7 Net profit 12 16 17 38 47 Debentures 3 4 4 4 4 NP for controlling interest 18 18 17 34 43 Total liabilities 151 145 145 158 176 Total comprehensive income 6 17 20 41 50 Equity, controlling interest 343 360 378 412 453 Total comprehensive income, CI 13 19 20 34 42 Paid-in capital 9 9 9 9 9 Note: Operating profit calculation same as K-GAAP (sales - COGS - SG&A exp) Capital surplus 209 209 209 209 209 Retained earnings 124 140 154 185 226 Equity, non-controlling interest 89 90 94 103 113 Total equity 432 449 472 515 566 Net debt -142 16 -92 -124 -302 Total debt 77 84 85 95 106 Cash flow statement Valuation FY ends Dec (Wbn) 2017A 2018A 2019E 2020E 2021E FY ends Dec 2017A 2018A 2019E 2020E 2021E Operating cash flow 22 22 40 52 73 EPS (won) 991 968 931 1,880 2,377 Net profit 12 17 17 38 47 BPS (won) 17,670 18,544 19,457 21,233 23,322 Depreciation & amortization 4 5 6 7 7 EBITDA/shr (won) 1,847 970 1,185 3,280 3,765 Forex gain/loss 1 0 0 0 0 SPS (won) 18,292 14,625 15,074 23,353 25,829 Affiliate invest gain/loss 0 1 0 0 0 DPS (won) 150 150 150 150 150 Inc (dec) in net working cap -7 3 24 16 27 P/E (x) 29.6 36.2 36.5 18.1 14.3 Other 11 -3 -7 -9 -9 P/B (x) 1.7 1.9 1.7 1.6 1.5 Investing cash flow -54 -66 -34 -23 -18 EV/EBITDA (x) 13.2 39.2 26.5 9.2 5.7 Investment -53 -39 0 0 0 P/S (x) 1.6 2.4 2.3 1.5 1.3 Inc in tangible assets -30 -26 -16 -7 -7 Dec in tangible assets 0 0 0 0 0 Key financial data Other 29 -1 -18 -16 -11 FY ends Dec 2017A 2018A 2019E 2020E 2021E Financing cash flow 71 1 -2 7 7 Sales (% YoY) 8.7 -18.3 3.1 54.9 10.6 Inc (dec) in ST fin liab 0 2 1 10 10 Operating profit (%YoY) -21.1 -62.4 29.3 327.2 18.5 Inc (dec) in LT fin liab 9 3 0 0 0 Net profit, CI (%YoY) -4.9 0.0 -4.9 101.9 26.5 Inc (dec) in equity 50 0 0 0 0 Gross margin (%) 28.8 29.7 29.3 30.0 30.0 Cash dividend -4 -3 -3 -3 -3 Operating margin (%) 7.2 3.3 4.2 11.5 12.3 Other 16 -1 0 0 0 Net margin, CI (%) 5.1 6.2 5.7 7.5 8.6 Other cash flow -2 1 105 6 126 EBITDA margin (%) 10.1 6.6 7.9 14.0 14.6 Inc (dec) in cash & equivalents 37 -40 108 43 188 ROIC (%) 7.4 3.5 3.6 16.3 19.0 Beginning cash & equivalents 62 99 59 167 210 ROA (%) 3.3 3.0 2.8 5.3 6.1 Ending cash & equivalents 99 59 167 210 398 ROE (%) 5.7 5.1 4.6 8.7 10.0 NOPLAT 25 9 12 52 62 Debt-to-equity (%) 35.1 32.2 30.8 30.8 31.1 FCF -17 -7 26 55 72 Net debt-to-equity (%) -41.4 4.4 -24.3 -30.2 -66.7 OP/financing cost (x) 14.6 4.5 24.6 40.1 33.6 Note: CI = controlling interest EPS, BPS, P/E and P/B are based on controlling interest For valuation metrics such as P/E, historical figures are based on annual average prices and estimates, on current price For ROA or ROE, assets and equity are averages of end-of-year figures for the given year and the year prior Source: Yuanta Securities 2 Company Report P/E band chart P/B band chart (W'000) (W'000) 700 Price (adj) 1,200 Price (adj) 19.4 x 4.3 x 600 31.6 x 1,000 8.5 x 43.8 x 12.7 x 500 56.0 x 800 16.9 x 68.2 x 21.2 x 400 600 300 400 200 100 200 0 0 Jan-12 Jan-15 Jan-18 Jan-21 Jan-12 Jan-15 Jan-18 Jan-21 YG Entertainment (122870 KS) ratings and target price history Difference (%) TP time Date Rating TP (won) frame vs avg vs high (won) price (low) 250,000 Current Price Target Price 2019/05/14 BUY 152,000 1 yr 200,000 2018/11/08 BUY 182,000 1 yr -25.43 -14.56 2018/05/30 BUY 212,000 1 yr -30.31 -15.57 150,000 Analyst changed 100,000 2017/05/31 After 1yr 1 yr -30.98 -8.24 50,000 2016/05/31 BUY 185,270 1 yr -28.69 -6.84 0 May-17 Nov-17 May-18 Nov-18 May- Note: Difference = (actual price* - target price) / target price x 100 * 1) The average price until the day target price was suggested 2) The highest (lowest) price until the day target price was suggested Source: Yuanta Securities Current distribution of Yuanta Securities Korea ratings Rating Share (%) STRONG BUY 0.5 BUY 86.5 HOLD 13.0 SELL 0.0 Total 100.0 Note: As of May 11 Excluding reports written or published by overseas affiliates 3 YG Entertainment (122870 KS) Disclosures & disclaimers This research report has been prepared for informational purposes only; it does not constitute an offer or a solicitation of an offer to buy or sell any securities or other financial instruments.