YG Entertainment (122870 KQ ) Buying opportunity amid shifting perceptions Entertainment Shifting perceptions: 1) Normalized lineup and new artist momentum Concerns over YG Entertainment’s artist void are dissipating. The company’s star group Big Bang is preparing to make a comeback, and at least one new act will debut this Company Report year. The company will have a total of five groups that can go on overseas arena tours, February 27, 2020 and we see potential for additional growth. Big Bang will make its long-awaited comeback at the US Coachella festival in April. With their contract almost certain to be renewed, the group is likely to release a new album and embark on a world tour. We expect to see additional positive headlines soon . BLACKPINK is set to make its return with the release of a new album around April , which (Upgrade) Buy is likely to include major collaborations related to its partnership with Universal Music Group . The group is also planning to tour the US and Europe, and the minimum Target Price (12M, W) 40,000 guarantee for the concerts is likely to be raised from last year, leading to a meaningful profit contribution. Meanwhile, iKON returned to the stage in early 2020 as a six-member Share Price (02/26/20, W) 31,750 group. For Treasure 12, whose debut was postponed for a year due to a scandal, the company is currently working on pre-marketing ahead of the group’s official debut. Expected Return 26% Shifting perceptions: 2) Discontinuation of loss-making operations to accelerate profit improvement YG Entertainment is unloading its new businesses and instead focusing on its core OP (19P, Wbn) 1 businesses. In 4Q19, the company decided to discontinue its content production Consensus OP (19F, Wbn) -7 business (parent) and restaurant business (YG Foods), which collectively recorded losses of roughly W10bn in 2019. The company is also in the process of drastically EPS Growth (19P, %) - scaling back its remaining new businesses (cosmetics, fashion, etc.). Looking ahead , YG Market EPS Growth (19F, %) -35.0 Plus’s operations will be narrowed down to areas related to its core businesses, such as P/E (19P, x) - digital music distribution. After much trial and error, we believe YG Entertainment will Market P/E (19F, x) 14.8 use its future profits on investments that are recoverable and can contribute to the KOSDAQ 654.63 revenue base of its core businesses—a change that investors have long called for. Market Cap (Wbn) 578 Shifting perceptions: 3) Big Hit Entertainment’s IPO to benefit entire sector Shares Outstanding (mn) 18 Big Hit Entertainment, which has gained significant influence on the global stage , looks Free Float (%) 65.6 likely to go public this year. We think the company could fetch a market value far a bove Foreign Ownership (%) 17.3 that of the three major entertainment stocks combined, given: 1) its operating profit growth trend (W64.1bn in 2018, W100bn in 2019F, and W150bn in 2020F; based on Beta (12M) 0.87 company data/guidance); 2) the scale of world tours that have already been confirmed; 3) 52-Week Low 19,450 and the potential for additional label acquisitions and business model expansion. In our 52-Week High 45,400 view, Big Hit Entertainment’s IPO could act as a catalyst for a re-rating of Korea’s entertainment industry by promoting a better understanding among global investors of (%) 1M 6M 12M the industry’s unique business model and its strong profit leverage. Furthermore, we Absolute -4.7 63.2 -30.1 think domestic entertainment companies could benefit from the geographical expansion Relative -0.1 45.4 -20.2 of K-pop driven by BTS. Of note, Studio Dragon’s (253450 KQ/Buy/TP: W112,000/CP: W78,000) IPO was followed by a re-rating across drama production peers. 110 YG Entertainment KOSDAQ Upgrade to Buy; Profits and valuation to both expand in 2020 90 We upgrade our rating on YG Entertainment to Buy and present a target price of 70 W40,000, which is based on 24x our net profit attributable to controlling interests estimate for 2021, the year operating earnings are expected to fully normalize. We 50 applied a 20% discount to our target sector P/E of 30x in light of our use of 2021 as the 30 base year. As earnings show signs of improvement, we expect the stock’s discount to 2.19 6.19 10.19 2.20 narrow. The company’s core businesses are normalizing, loss-making sources have been removed, and a major peer with global influence is set to go public. And with the Mirae Asset Daewoo Co., Ltd. recognition of Big Bang’s activities, earnings risks should also be limited through 3Q20. [ Media ] FY (Dec.) 12/16 12/17 12/18 12/19P 12/20F 12/21F Revenue (Wbn) 322 350 286 264 337 402 Jeong -yeob Park +822 -3774 -1652 OP (Wbn) 32 24 10 1 20 40 [email protected] OP margin (%) 9.9 6.9 3.5 0.4 5.9 10.0 NP (Wbn) 19 18 18 -20 16 30 EPS (W) 1,094 931 911 -1,030 862 1,669 ROE (%) 7.7 5.7 5.1 -5.7 4.6 8.3 P/E (x) 25.9 31.0 52.2 - 36.8 19.0 P/B (x) 1.8 1.6 2.6 1.5 1.6 1.5 Dividend yield (%) 0.7 0.5 0.3 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 February 27, 2020 YG Entertainment 4Q19 review: Content/food operating losses reclassified as losses from discontinued operations For 4Q, YG Entertainment delivered consolidated revenue of W58bn (-28.1% YoY) and operating profit of W7.1bn (+125.5% YoY). Revenue fell below both our estimate and the consensus by roughly 14%, but operating profit beat expectations following the reclassification of W10bn in full-year operating losses from the content production (W6.2bn) and restaurant (W3.8bn) businesses as losses from discontinued operations. Meanwhile, the company posted a full-year net loss due to a W6bn penalty for tax evasion. Core businesses continued to struggle as expected, hurt by the postponement of major artists’ activities. Core business results reflect album sales (including 110,000 for WINNER and 30,000 for BLACKPINK), digital music sales (AKMU), and royalties from Japanese tours (WINNER, iKON, and BLACKPINK). Quarterly revenue from YouTube is estimated at W2.7bn. Table 1. YG Entertainment: Quarterly and annual earnings (Wbn, %, mn tickets, %p) 1Q19 2Q19 3Q19 4Q19P 1Q20F 2Q20F 3Q20F 4Q20F 2018 2019P 2020F Revenue 65 78 64 58 58 91 94 94 286 264 337 Products 19 26 23 22 23 32 30 28 101 90 113 Management 43 50 38 43 36 58 64 66 185 175 224 Gross profit 17.3 22.5 18.1 21.8 19.4 25.2 31.1 31.4 85 80 107 Operating profit -2.3 0.2 -3.0 7.1 1.3 2.9 6.5 9.0 10 2 20 OP margin (%) -3.7 0.3 -4.8 12.2 2.3 3.2 6.9 9.6 3.4 0.8 5.9 Pretax profit 14.3 -9.3 -7.7 0.6 1.8 3.4 7.0 9.5 26 -2 22 Net profit 7.3 -6.4 -6.4 -19.2 1.4 2.6 5.3 7.2 16 -25 17 Net margin (%) 11.3 -8.1 -10.0 -33.2 2.4 2.8 5.7 7.7 5.6 -9.3 4.9 Net profit attributable to controlling interests 8.4 -6.1 -4.8 -17.3 1.3 2.4 5.1 6.9 17.8 -19.8 15.7 YoY Revenue -16.3 24.5 -2.3 -28.1 -9.6 16.0 47.4 62.1 -18.3 -7.5 27.4 Products -2.9 -0.9 -22.6 -14.4 21.0 25.9 27.3 27.5 -23.9 -11.2 25.6 Management -26.1 36.0 9.1 -20.9 -16.6 16.5 67.3 51.9 -14.9 -5.5 28.4 Gross profit -15.4 3.4 -16.1 2.3 11.7 12.2 72.1 44.3 -15.5 -6.3 34.4 Operating profit TTR -87.6 TTR 94.7 TTB 1,211.7 TTB 27.7 -60.3 -78.9 874.4 Net profit 837.0 TTR TTR TTR -80.9 TTB TTB TTB 33.9 TTR TTB Major assumptions Japanese concert ticket sales volume 0.1 0.0 0.2 0.1 0.2 0.4 0.6 0.8 0.4 0.4 2.0 Source: Company data, Mirae Asset Daewoo Research Table 2. YG Entertainment: Earnings forecast revisions (Wbn, %) Previous Revised % chg. Notes 20F 21F 20F 21F 20F 21F Revenue 370 426 337 402 -8.9 -5.6 Reflected postponement of artist activities due to COVID-19 Operating profit 26 40 20 40 -24.1 0.2 Net profit 18 29 16 30 -12.8 4.8 OP margin (%) 7.0 9.4 5.9 10.0 -1.2 0.6 Net margin (%) 4.9 6.8 4.7 7.6 -0.2 0.7 Source: Mirae Asset Daewoo Research Mirae Asset Daewoo Research 2 February 27, 2020 YG Entertainment Valuation Upgrade to Buy and present a TP of W40,000 We upgrade our rating on YG Entertainment to Buy and present a target price of W40,000.