YG Entertainment (122870.KQ) Global recognition confirmed by new records Company Note │Jun 30, 2020 BLACKPINK’s How You Like That has set new records on Spotify and ※ Refer to page 2 for YouTube, confirming increased global awareness of the group. The group is ESG index/event tables also expected to set a new K-pop record for the Billboard Hot 100 chart, which is based on popularity. We raise our TP on the firm to W48,000 Buy (maintain) (+29.7%), and continue to recommend it as a sector top pick. TP (12-mth) W48,000 (raise) CP (’20/06/29) W37,000 Sector Entertainment BLACKPINK confirms strong global awareness Kospi/Kosdaq 2,093.48 / 734.69 Market cap (common) US$561.80mn BLACKPINK’s new single How You Like That (released on Jun 26) from its Outstanding shares (common) 18.2mn upcoming album is setting new records in digital channels. Both the time 52W high (’20/06/29) W37,000 required to reach 100mn views on YouTube (32 hours) and reaching second in low (’19/08/26) W19,450 Average trading value (60D) US$10.68mn Spotify’s daily global rankings are new K-pop records. Demand for the group’s Dividend yield (2020E) 0.00% album and merchandise to be released on Jul 17 is expected to be high. We Foreign ownership 12.9% believe that future releases will continue to be successful based on the firm’s Major shareholders high global recognition. HS Yang & 5 others 21.0% NAVER 9.1% Pay particular attention to growth of digital channels in NA market Share perf 3M 6M 12M Absolute (%) 51.6 38.3 27.8 BLACKPINK’s How You Like That recently ranked eighth on the North Relative (%p) 7.9 24.5 20.1 American (NA) Spotify chart, which is a record for the group. We also expect 2019 2020E 2021F 2022F BLACKPINK to break the K-pop record for the Billboard Hot 100 entry (33rd). Sales 264.5 272.7 384.5 423.3 Considering that both charts are based on popularity, we believe that public Chg -1.7 3.1 41.0 10.1 awareness of the group is expanding in NA. Such demand should serve as a OP 0.9 19.1 41.8 47.9 growth driver for digital music sales regardless of Covid-19. In addition, concert Chg -95.5 2,022.2 118.8 14.6 revenue is likely to level up once tours resume. OPM 0.3 7.0 10.9 11.3 NP -21.5 17.8 29.1 52.6 Maintain as sector top pick considering differentiated momentum EPS -1,184 978 1,597 2,891 Chg -222.3 -182.6 63.3 81.0 We maintain our Buy rating and raise our TP from W37,000 to W48,000. When P/E N/A 37.8 23.2 12.8 previously calculating our TP, we applied a 25% discount rate considering the P/B 1.5 1.9 1.8 1.5 financial market and external environment uncertainty related to Covid-19. EV/EBITDA 29.1 15.5 10.5 9.1 However, we have now lifted this discount to reflect the company’s ROE -6.2 5.1 7.9 12.8 differentiated momentum in NA. Debt/equity 22.5 24.3 24.3 22.2 Regardless of Covid-19, we expect the firm to benefit from: 1) the growth Net debt -37.1 -48.7 -91.4 -135.4 Unit: Wbn, %, won, x potential of digital channels; and 2) its lineup expansion (newcomers, Note 1: NP excludes minority interests BIGBANG). When the external environment improves, focus on the company is Note 2: EPS, P/E, P/B, ROE based on NP (excl minority interests) predicted to increase given its lineup of two large groups (BIGBANG, Source: NH I&S Research Center estimates BLACKPINK) that are capable of conducting global dome tours. Short-term momentum is likely to be driven by Treasure 12’s debut → BLACKPINK’s single release → BLACKPINK’s album release. 2Q20 preview (Units: Wbn, %) 2Q20E 2Q19 3Q19 4Q19 1Q20 3Q20F Est y-y q-q Prev Consen Sales 78.1 63.7 58.0 52.8 50.0 -36.0 -5.4 50.3 54.2 79.4 OP 0.2 -3.0 3.1 -2.1 0.7 -41.8 TTP 0.9 -0.7 8.0 OPM 0.3 -4.7 5.4 -4.0 1.4 1.7 -1.3 10.1 Pre-tax profit -9.2 -7.5 -2.6 -5.7 2.2 TTP TTP 2.4 1.2 9.5 Hazell Lee, Analyst 822)768-7535, [email protected] NP (excl min int) -6.1 -4.8 19.0 -12.7 2.8 TTP TTP 2.9 0.2 11.9 Note: K-IFRS consolidated; Source: FnGuide, NH I&S Research Center estimates YG Entertainment www.nhqv.com Summary Established in Feb 1998, YG Entertainment is an entertainment firm that plans, produces, and distributes albums and manages artists. It also engages in other businesses via subsidiaries. The company plans to dispose of businesses unrelated to music (eg, cosmetics and exports) by end-2020. Major artists include BLACKPINK, BIGBANG, iKON, and WINNER. In 2H20, two new groups, including Treasure, are slated to debut. By business, 2019 sales broke down as: 1) albums 5%, digital tracks 21%, artist merchandise 8%, concerts 9%, royalties (Japan) 7%, and others 50%. In light of its higher earnings visibility and growth potential, we present a Buy rating and TP of W48,000 for YG Entertainment, offering the play as our sector top pick. Share price drivers/earnings momentum Downside risks Improvement in Korea-China relations to enable firm to obtain Governance risks approval for concerts in China for BIGBANG and BLACKPINK Failure to secure successful new artist lineups Concerts in regions where K-pop has yet to enjoy popularity Uncertainties regarding contract renewals with major artists Cross valuations (Unit: x, %) Historical valuations (Unit: x, %) P/E P/B ROE Company Valuations 2018 2019 2020E 2021F 2022F 2020E 2021F 2020E 2021F 2020E 2021F JYP Ent. 20.4 16.3 3.6 3.1 17.8 19.0 P/E 49.1 N/A 37.8 23.2 12.8 SM Entertainment 44.8 15.1 1.1 1.1 2.5 7.1 P/B 2.6 1.5 1.9 1.8 1.5 Cube Entertainment N/A N/A N/A N/A N/A N/A P/S 3.2 1.9 2.5 1.8 1.6 J Contentree 560.0 15.3 1.5 1.4 0.3 9.0 ROE 5.1 -6.2 5.1 7.9 12.8 ROIC 6.8 0.4 4.9 12.4 15.7 Source: FactSet, NH I&S Research Center Source: NH I&S Research Center ESG index (Unit: %, Wbn, years, hours, ‘000TJ, mn tCO2e, mn tons) BOD composition Human resources 2017 2018 2019 Hwang Bo-kyung CEO and BOD chair Inside Portion of female employees 50.7 53.6 52.6 Yang Min-seok YG PLUS CEO Inside Portion of contract workers 5.9 5.2 1.9 Choi Sung-joon Inside Avg service period per employee 2.8 3.3 4.0 Yu Hae-min Inside Avg training hours per employee N/A N/A N/A Kim Ro-sean Inside Lee Ho-sang Outside Environment 2017 2018 2019 Tang Xiao Ming Outside Energy consumption N/A N/A N/A Cho Young-bong Outside Greenhouse gas emissions N/A N/A N/A Recycled water consumption N/A N/A N/A Recycled waste N/A N/A N/A Source: YG Ent, NH I&S Research Center ESG events E – N/A 2019.6 – Investigations began over former CEO Yang Hyun-seok’s alleged cover-up of drug purchase by firm’s artist S – Investigations began over alleged violation of the Act on the Punishment of Arrangement of Commercial Sex Acts by a former 2019.2 Big Bang member during his operation of a club – Faced a fine of W3.5bn regarding remittance to overseas branches and income taxes that were unreported by subsidiaries and 2016.8 G overseas branches 2009.12 – Three employees were prosecuted for embezzling W2.5bn from artists’ performance fees Source: YG Ent, NH I&S Research Center 2 YG Entertainment www.nhqv.com BLACKPINK has high global recognition BLACKPINK’s BLACKPINK’s new single How You Like That (released on Jun 26) from its upcoming record-setting album is setting new records in digital channels. Both the time required to reach 100mn results confirm its views on YouTube (32 hours vs 36 hours for BTS’s ON) and reaching second in global recognition Spotify’s daily global rankings (vs third place for BTS’s Boy With Luv (Feat Halsey)) are new K-pop records. High initial hits on As the general public tends not to follow information on artists’ comeback dates or video YouTube prove that releases, we believe that initial hits on YouTube mainly come from fans. Based on its artists boast strong high number of YouTube hits, BLACKPINK appears to have a strong fan base. fan base Accordingly, we expect to see strong demand for the group’s album and merchandise to be released on Jul 17. Future releases will likely continue to be successful given the firm’s high global recognition. Ranking high on We draw particularly attention to BLACKPINK’s success in NA. How You Like That Spotify recently ranked eighth on the NA Spotify chart, which is a new record for the group.