[Korea] Entertainment November 12, 2020 YG Entertainment Trading Buy (122870 KQ ) (Maintain) Returning to normalcy TP: W51,000 Upside: 19.2% Mirae Asset Daewoo Co., Ltd. Jeong -yeob Park [email protected] 3Q20 review : Better than Consolidated revenue of W 66 .8bn (+8.5% YoY ) and OP of W 3.2bn (turn to profit YoY ) expected In 3Q20, YG Entertainment’s margins improved on: 1) the gradual resumption of artist activities from August; and 2) robust physical album/digital platform sales. Revenue from albums/digital music/goods grew 30.9% YoY. Album sales hit a quarterly high of 820,000 copies (360,000 copies for BLACKPINK and 460,000 copies for Treasure). Around 76% of digital music sales came from overseas (vs. 24% for domestic), underscoring the company’s potential for growth through global expansion. Revenue from Google jumped from W2bn to over W4bn, fueled by YouTube subscriber growth and the release of BLACKPINK’s hit single. Despite overall constraints on artist activities, management revenue (-5.1% YoY) held up well thanks to ad/ album production. Expanded global lineup Given expanded lineup, earnings could grow strongly in 2021 on a return to normalcy Looking to 4Q20, we expect BLACKPINK/Treasure/Song Min-ho (album sales and activities) and AKMU (digital music sales) to drive robust earnings. We are encouraged by the company’s growing digital music base (YouTube and QQ Music) and expanding advertising income sources. Meanwhile, the company has successfully expanded BLACKPINK’s global fan base and established Treasure’s presence in Japan by focusing on content offerings in 2020. In 2021, expected concert attendance levels could sharply increase on the back of G-Dragon’s comeback and the execution of online/offline concerts . Recommendation and valuation Look toward resumption of offline concerts We keep our Trading Buy rating and target price of W51,000, which is based on 25x (three-year average) our 2021F EPS. Key achievements in 2020: Global lineup expansion (from one to three groups) and enhanced power of albums/digital music Key upside risks: Artist activities (G-Dragon , Lisa, etc.) in China and execution of online/offline concerts We believe the stock has overreacted to external headwinds. We could see sharp gains ahead if concerts and G-Dragon’s activities begin to resume. We advise taking a more positive stance on the company’s stock, but note that the earnings and stock supply/demand of a major peer could affect share performance in the near term. Key data Current price (11/11/20, W) 42,800 Market cap (Wbn) 788 250 YG Entertainment KOSDAQ OP (20F, Wbn) 6 Shares outstanding (mn) 18 200 Consensus OP (20F, Wbn) 10 Free float (%) 68.2 150 EPS growth (20F, %) - Foreign ownership (%) 11.9 100 P/E (20F, x) 120.4 Beta (12M) 0.88 50 Market P/E (20F, x) 16.8 52-week low (W) 19,450 11.19 3.20 7.20 11.20 KOSDAQ 839.90 52-week high (W) 58,700 Share performance Earnings and valuation metrics (%) 1M 6M 12M (Dec.) 2016 2017 2018 2019 2020F 2021F Absolute -14.1 42.4 64.3 Revenue (Wbn) 322 350 269 264 240 332 Relative -10.8 16.2 29.4 OP (Wbn) 32 24 20 1 6 40 OP margin (%) 9.9 6.9 7.4 0.4 2.5 12.0 NP (Wbn) 19 18 18 -22 7 37 EPS (W) 1,094 931 911 -1,118 356 2,014 ROE (%) 7.7 5.7 5.1 -6.2 1.9 10.3 P/E (x) 25.9 31.0 52.2 - 120.4 21.3 P/B (x) 1.8 1.6 2.6 1.5 2.3 2.1 Div. yield (%) 0.7 0.5 0.3 0.0 0.0 0.0 Notes: Under consolidated K-IFRS; NP is attributable to owners of the parent Source: Company data, Mirae Asset Daewoo 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. November 12, 2020 YG Entertainment Table 1. Valuation (Wbn) Valuation - P/E 2020F 2021F Fair market cap 927 927 NP 7 37 Target P/E (x) 139.3 25.0 Avg. P/E (three years) Fair price (W) 51,000 51,000 19.2% upside Source: Mirae Asset Daewoo Research Table 2. Quarterly and annual earnings (Wbn, %, mn tickets, %p) 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20P 4Q20F 2019 2020F 2021F Revenue 65 78 64 58 53 55 67 66 264 240 332 Products 19 26 23 22 17 17 30 28 90 92 124 Management 43 50 38 43 36 38 37 38 175 149 208 Gross profit 17.3 22.5 18.1 22.5 17.3 20.0 21.7 22.9 80 82 117 OP -2.7 -0.1 -3.2 6.9 -2.5 1.5 3.2 4.3 1 6 40 OP margin (%) -4.4 -0.1 -5.2 11.9 -4.8 2.6 4.8 6.6 0.3 2.5 12.0 Pretax profit 14.3 -9.3 -7.7 0.6 -5.7 14.4 3.5 5.2 -2 17 44 NP 7.3 -6.4 -6.4 -19.2 -8.9 7.5 1.6 4.1 -25 4 34 Net margin (%) 11.3 -8.1 -10.0 -33.2 -16.8 13.6 2.4 6.3 -9.3 1.8 10.2 NP attributable to owners 8.4 -6.1 -4.8 -19.0 -4.2 7.2 1.0 2.6 -21.5 6.7 37.1 YoY Revenue -16.3 24.5 -2.3 -9.1 -18.3 -29.4 8.5 13.0 -1.7 -9.1 38.1 Products -2.9 -0.9 -22.6 -14.4 -12.0 -33.2 30.9 25.3 -11.2 2.2 35.0 Management -26.1 36.0 9.1 -20.9 -15.2 -24.1 -5.1 -12.6 -5.5 -14.9 40.0 Gross profit -15.4 3.4 -16.1 -14.4 -0.1 -10.8 20.1 1.5 -10.7 1.9 42.6 OP TTR TTR TTR -50.0 RR TTB TTB -37.4 -95.5 628.5 518.9 NP 837.0 RR TTR TTR TTR TTB TTB TTB TTR TTB 672.5 Major assumptions Japanese concert ticket sales volume 0.1 0.0 0.2 0.1 0.2 0.0 0.0 0.0 0.4 0.2 1.2 Source: Company data, Mirae Asset Daewoo Research Figure 1. Robust album sales growth in 3Q20 for YG Entertainment ('000) 1,600 1,200 800 400 0 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20P 4Q20F Source: Company data, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 2 November 12, 2020 YG Entertainment Figure 2. YG’s YouTube-related revenue is estimated to have grown sharply in 3Q20 (Wmn) 5,000 4,000 3,000 2,000 1,000 0 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20P Source: Mirae Asset Daewoo Research estimates Figure 3. YouTube views by label: Increasing in line with new album releases (mn views) 800 SM (SMTOWN) JYP (jypentertainment + TWICE) YG (YG ENTERTAINMENT + BLACKPINK + iKON + WINNER) 600 Big Hit (Big Hit Labels + BANGTANTV) 400 200 0 8/15 12/15 4/16 8/16 12/16 4/17 8/17 12/17 4/18 8/18 12/18 4/19 8/19 12/19 4/20 Source: YouTube, Mirae Asset Daewoo Research Figure 4. YouTube channel subscriptions by label: Global growth continues (mn) 100 SM (SMTOWN) 90 JYP (jypentertainment + TWICE) YG (YG ENTERTAINMENT + BLACKPINK + iKON + WINNER) 80 Big Hit (Big Hit Labels + BANGTANTV) 70 60 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 5/20 9/20 Source: YouTube, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 3 November 12, 2020 YG Entertainment YG Entertainment (122870 KQ) Income statement (summarized) Balance sheet (summarized) (Wbn) 2018 2019 2020F 2021F (Wbn) 2018 2019 2020F 2021F Revenue 269 264 240 332 Current assets 233 160 187 229 Cost of revenue 179 184 158 215 Cash & equivalents 59 48 60 76 GP 90 80 82 117 AR & other receivables 30 19 21 29 SG&A expenses 70 80 75 77 Inventory 23 16 18 25 OP (adj.) 20 1 6 40 Other current assets 121 77 88 99 OP 20 1 6 40 Non-current assets 362 356 336 360 Non-operating profit 17 -3 11 4 Investments in associates 24 23 26 36 Net financial income 5 2 1 1 PP&E 105 149 162 152 Net income from associates 0 0 0 0 Intangible assets 61 52 49 49 Pretax profit 37 -2 17 44 Total assets 594 516 523 589 Income tax 12 12 9 11 Current liabilities 63 77 89 121 Profit from continuing operations 25 -14 8 34 AP & other payables 32 33 37 52 Profit from discontinued operations -9 -11 -4 0 Short-term financial liabilities 3 13 17 22 NP 16 -25 4 34 Other current liabilities 28 31 35 47 Attributable to owners 18 -22 7 37 Non-current liabilities 82 18 18 19 Attributable to minority interests -2 -3 -2 -3 Long-term financial liabilities 80 17 17 17 Total comprehensive income 17 -24 5 34 Other non-current liabilities 2 1 1 2 Attributable to owners 19 -21 9 59 Total liabilities 145 95 107 140 Attributable to minority interests -2 -3 -4 -26 Equity attributable to owners 359 337 342 379 EBITDA 28 19 21 53 Capital stock 9 9 9 9 FCF -1 19 -10 46 Capital surplus 209 210 210 210 EBITDA margin (%) 10.4 7.2 8.8 16.0 Retained earnings 140 115 122 159 OP margin (%) 7.4 0.4 2.5 12.0 Minority interests 90 85 73 70 Net margin (%) 6.7 -8.3 2.9 11.1 Shareholders' equity 449 422 415 449 Cash flow statement (summarized) Key valuation metrics/ratios (Wbn) 2018 2019 2020F 2021F 2018 2019 2020F 2021F Operating cash flow 22 60 15 48 P/E (x) 52.2 - 120.4 21.3 NP 16 -25 4 34 P/CF (x) 35.6 30.3 37.4 14.2 Non-cash income/expenses 10 42 17 22 P/B (x) 2.6 1.5 2.3 2.1 Depreciation 4 14 12 11 EV/EBITDA (x) 32.1 30.0 37.5 14.5 Amortization 4 3 2 2 EPS (W) 911 -1,118 356 2,014 Other 2 25 3 9 CFPS (W) 1,335 903 1,144 3,016 Chg.