[Korea] Entertainment May 17, 2021 JYP Entertainment Buy (035900 KQ ) (Maintain) Solid earnings despite absence of concerts TP: W47,000 Upside: 30.9% Mirae Asset Securities Co., Ltd. Jeong -yeob Park [email protected] 1Q21 review : Better than Consolidated revenue of W32.3bn ( -4.9% YoY), OP of W13.8bn (+2.5% YoY) expected Although 1Q21 revenue contracted on a void in artist activities, OP margin hit a record high of 42.6%, bolstered by the impact of strong digital content revenue. Gross margin improved 5.6%p YoY to 65.1%, thanks to overseas content-driven growth (higher mix of non-management revenue). 1) Album/digital music (+44.1% YoY): Overseas digital music revenue soared 141% YoY, boosted by a new contract with a Chinese company. Album revenue grew 25% YoY. 2) Management (-28.5% YoY): Performance/appearance revenue declined, though advertising revenue modestly recovered (+17% QoQ). 3) Merchandise/other (-26.0% YoY): Merchandise revenue slumped 67% YoY, but YouTube revenue continued to grow (+112% YoY to W3.4bn). Despite an uptick in SG&A expenses (+7.5% YoY), the shift in the income structure from management to content improved underlying profitability. Robust earnings expected in New artist projects and artist activities to gather steam 2021 Following a lull in 1Q21, JYP’s artist lineup will become active again from 2Q21, with 2PM (full group) and TWICE (individual ads and comebacks every two months) resuming activities, ITZY releasing a new album every quarter, and Stray Kids continuing activities. Given the growing fan bases of the next-generation artist lineup (Stray Kids and ITZY) , expectations on album sales are increasing every year. Meanwhile, NiziU’s album released in April sold 460,000 copies; we estimate the group has contributed over W10bn in revenue so far. The company also has ample new artist momentum, with an audition show (LOUD ) airing in June and artist development projects for 2022 underway in China (Project C) and the US. We believe the strength of digital content will continue, solidifying the company’s ability to grow earnings without the help of concerts. Recommendation and valuation Maintain Buy and TP of W47,000 Our target valuation is based on a P/E of 30x our 2022F net profit attributable to owners of the parent of W55.2bn. Earnings worries caused by the absence of concerts are subsiding thanks to strong content revenue. Expectations on reopening could also come into play. We think JYP Entertainment is in a swe et spot, given its cash cow (TWICE), growth profile (Stray Kids/ITZY), and global exposure (NiziU and new artists in the US/China/Japan). We see potential for collaborations through strategic investments, as well as additional partnerships. Key data Current price (5/14/21, W) 35,900 Market cap (Wbn) 1,274 230 JYP Entertainment KOSDAQ OP (21F, Wbn) 58 Shares outstanding (mn) 35 180 Consensus OP (21F, Wbn) 55 Free float (%) 74.9 EPS growth (21F, %) 53.0 Foreign ownership (%) 21.4 130 P/E (21F, x) 28.2 Beta (12M) 1.14 80 Market P/E (21F, x) 11.9 52-week low (W) 19,100 5.20 9.20 1.21 5.21 KOSDAQ 966.72 52-week high (W) 43,250 Share performance Earnings and valuation metrics (%) 1M 6M 12M (Dec.) 2017 2018 2019 2020 2021F 2022F Absolute 5.7 0.0 67.8 Revenue (Wbn) 102 125 155 144 170 211 Relative 11.0 -13.2 19.8 OP (Wbn) 19 29 43 44 58 73 OP margin (%) 18.6 23.2 27.7 30.6 34.1 34.6 NP (Wbn) 16 24 31 30 45 55 EPS (W) 471 685 883 832 1,273 1,555 ROE (%) 21.4 22.5 21.9 17.3 22.3 22.2 P/E (x) 29.2 44.2 27.4 46.2 28.2 23.1 P/B (x) 4.8 7.7 5.0 7.0 5.4 4.5 Div. yield (%) 0.0 0.4 0.6 0.4 0.4 0.4 Notes: Under consolidated K-IFRS; NP is attributable to owners of the parent Source: Company data, Mirae Asset Securities Research estimat es Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including t he US. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES AND DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. May 17, 2021 JYP Entertainment Table 1. JYP Ent.: Quarterly and annual earnings (Wbn, %, %p) 1Q20 2Q20 3Q20 4Q20 1Q21P 2Q21F 3Q21F 4Q21F 2020 2021F 2022F Revenue 34 34 35 42 32 37 44 56 144 170 211 Album/digital content 10 22 18 24 15 19 23 29 75 85 98 Management 6 3 5 5 4 4 7 13 19 27 41 Concerts 1 0 0 0 0 0 0 4 1 5 16 Advertising 4 3 3 3 3 3 4 4 12 14 14 Appearance fees 1 1 2 3 1 1 3 4 6 8 11 Other 18 9 12 12 13 14 15 15 50 57 72 OP 13.4 9.1 11.1 10.5 13.8 12.9 16.0 15.5 44 58 73 OP margin (%) 39.6 26.5 32.2 25.2 42.6 35.1 36.1 27.5 30.6 34.2 34.8 Pretax profit 14.2 7.9 9.9 5.9 14.3 12.5 15.5 13.7 38 56 71 NP 11.3 4.7 7.7 5.9 12.0 10.0 12.4 10.9 30 45 54 Net margin (%) 33.3 13.8 22.3 14.2 37.2 27.3 27.9 19.4 20.5 26.7 25.7 NP attributable to owners of the parent 11.3 4.7 7.7 5.8 12.0 10.0 12.3 10.9 29.5 45.2 55.2 YoY Revenue 28.9 -12.8 -24.1 -6.0 -4.9 7.2 28.6 35.2 -7.1 17.6 24.0 Album/digital content 8.9 50.6 10.3 47.1 44.1 -16.3 27.5 17.6 31.2 13.5 15.0 Management -38.8 -75.2 -70.5 -53.6 -28.5 26.0 28.9 135.0 -62.3 41.5 50.0 Concerts -37.1 -100.0 -99.5 TTR -76.0 - 554.8 TTB -94.6 333.8 223.3 Advertising -8.2 -39.9 -33.4 -40.2 -11.4 30.0 20.0 60.0 -31.2 21.9 -3.2 Appearance fees -76.3 -83.3 -23.7 10.5 -25.7 -30.0 30.0 50.0 -50.4 25.6 36.4 Other 135.1 -21.6 -4.3 -26.2 -26.0 61.6 30.0 26.1 6.9 14.4 25.0 OP 132.3 -3.9 -24.6 -22.1 2.5 42.0 44.2 47.3 1.6 31.8 25.9 NP 78.6 -32.4 -34.0 -5.2 6.4 113.0 61.0 84.9 -5.1 53.2 19.2 NP attributable to owners of the parent 76.3 -30.9 -34.5 -8.2 6.1 111.0 61.1 86.6 -5.6 53.0 22.2 Key assumptions Domestic album sales volume ( ‘000) 305 1,399 824 1,038 318 600 800 1,000 3,567 2,718 3,126 Notes: Under consolidated K-IFRS; concert ticket sales volume is based on actual timing of concerts and includes estimates Source: Company data, Mirae Asset Securities Research estimates Figure 1. Improvement in underlying profitability thanks to Figure 2. Improvement in underlying profitability thanks to strategic shift from management to content (quarterly) strategic shift from management to content (annual) (%) (%) (%) (%) 110 Contribution of non-management revenue (L) 70 110 Contribution of non-management revenue (L) 60 100 Gross margin (R) 100 Gross margin (R) 90 60 90 50 80 80 Assuming resumption of 70 50 70 concert activities 60 60 40 50 40 50 40 40 30 30 30 30 1Q17 3Q17 1Q18 3Q18 1Q19 3Q19 1Q20 3Q20 1Q21 2016 2017 2018 2019 2020 2021F 2022F Source: Company data, Mirae Asset Securities Research Source: Company data, Mirae Asset Securities Research Mirae Asset Securities Research 2 May 17, 2021 JYP Entertainment Figure 3. JYP Entertainment’s daily YouTube views rise in line with new album releases (mn views) "Mafia In the 30 "I Can't Stop Me" - TWICE Morning" - ITZY "More & More" - TWICE 25 "Wannabe" - ITZY "Not Shy" "Step and a - ITZY "Make You Step" - NiziU Happy" - NiziU 20 "Not by the Moon" - GOT7 15 10 5 "Back Door" - "God's Menu" - Stray Kids Stray Kids 0 1/20 3/20 5/20 7/20 9/20 11/20 1/21 3/21 5/21 Source: Social Blade, Mirae Asset Securities Research Figure 4. YouTube views by label: Traffic to increase on NiziU’s growing presence (mn views) 1,400 SM (SMTOWN) JYP (JYP Entertainment + TWICE) 1,200 YG (YG ENTERTAINMENT + BLACKPINK + iKON + WINNER) 1,000 Hybe (HYBE LABELS + BANGTANTV) 800 600 400 200 0 8/15 1/16 6/16 11/16 4/17 9/17 2/18 7/18 12/18 5/19 10/19 3/20 8/20 1/21 Source: Social Blade, Mirae Asset Securities Research Mirae Asset Securities Research 3 May 17, 2021 JYP Entertainment JYP Entertainment (035900 KQ) Income statement (summarized) Balance sheet (summarized) (Wbn) 2019 2020 2021F 2022F (Wbn) 2019 2020 2021F 2022F Revenue 155 144 170 211 Current assets 116 127 181 242 Cost of revenue 79 68 77 99 Cash & equivalents 39 35 58 91 GP 76 76 93 112 AR & other receivables 14 19 26 32 SG&A expenses 33 33 35 38 Inventory 1 0 1 1 OP (adj.) 43 44 58 73 Other current assets 62 73 96 118 OP 43 44 58 73 Non-current assets 92 97 96 95 Non-operating profit 0 -6 -2 -2 Investments in associates 0 2 3 3 Net financial income 1 1 2 2 PP&E 39 41 37 34 Net income from associates 0 0 0 0 Intangible assets 29 31 30 30 Pretax profit 43 38 56 71 Total assets 208 224 277 338 Income tax 12 8 11 17 Current liabilities 43 33 45 56 Profit from continuing operations 31 30 45 54 AP & other payables 10 11 15 19 Profit from discontinued operations 0 0 0 0 Short-term financial liabilities 1 1 2 2 NP 31 30 45 54 Other current liabilities 32 21 28 35 Attributable to owners 31 30 45 55 Non-current liabilities 2 4 5 6 Attributable to minority interests 0 0 0 -1 Long-term financial liabilities 1 2 2 2 Total comprehensive income 32 29 45 54 Other non-current liabilities 1 2 3 4 Attributable to owners 32 29 46 54 Total liabilities 45 38 50 62 Attributable to minority interests 0 0 0 0 Equity attributable to owners 159 182 223 273 EBITDA 47 48 62 77 Capital stock 18 18 18 18 FCF 49 18 53 61 Capital surplus 77 77 77 77 EBITDA margin (%) 30.3 33.3 36.5 36.5 Retained earnings 76 100 140 190 OP margin (%) 27.7 30.6 34.1 34.6 Minority interests 3 4 4 3 Net margin (%) 20.0 20.8 26.5 26.1 Shareholders' equity 162 186 227 276 Cash flow statement (summarized) Key valuation metrics/ratios (Wbn) 2019 2020 2021F 2022F 2019 2020 2021F 2022F Operating cash flow 51 22 53 61 P/E (x) 27.4 46.2 28.2 23.1 NP 31 30 45 54 P/CF (x) 17.9 29.3 21.8 17.7 Non-cash income/expenses 16 17 13 18 P/B (x) 5.0 7.0 5.4 4.5 Depreciation 3 4 4 3 EV/EBITDA (x) 16.3 26.4 18.2 14.1 Amortization 0 0 1 0 EPS (W) 883 832 1,273 1,555 Other 13 13 8 15 CFPS (W) 1,346 1,310 1,646 2,030 Chg.