JYP Entertainment (035900 KQ ) Strong growth of global platform revenue Entertainment 3Q18 review: Strong growth of global platform revenue (YouTube, Apple Music, etc.) Results Comment For 3Q18, JYP Entertainment reported consolidated revenue of W34bn (+93.9% YoY) and November 13, 2018 operating profit of W8.5bn (+664% YoY). Operating profit was in line with our projection (W8.6bn) and the consensus (W8.1bn). While earnings variables were somewhat soft compared with 2Q and 4Q, the high-quality nature of earnings was encouraging. In particular, revenue from global platforms, such as YouTube, displayed strong growth. (Maintain) Buy For album revenue, the company recognized domestic sales of around 800,000 copies , with TWICE (34 0,000 copies), GOT7 (350,000 copies), and Stray Kids (one year since Target Price (12M, W) 46,500 debut; 100,000 copies) all doing well. TWICE also sold 500,000 copies in Japan. For concert revenue, a total of 15 performances were recognized in the quarter , including Share Price (11/12/18, W) 31,050 GOT7’s North America/Europe tour and TWICE’s showcase in Japan (January) and concerts in Malaysia/Thailand/Seoul (August-September). Expected Return 50% Revenue from YouTube, a key area of interest, was in line with our expectation (W1bn) and continued to grow strongly. Global digital revenue excluding YouTube was also better than expected. We believe that YouTube revenue and global digital revenue in OP (18F, Wbn) 30 3Q18 were W0.9bn (versus W2bn in 2017 and W1.9bn in 1H18) and W1.75bn (versus Consensus OP (18F, Wbn) 30 W3bn in 2017 and W2.2bn in 1H18), respectively. EPS Growth (18F, %) 42.5 Highly anticipated 4Q18 is here Market EPS Growth (18F, %) 11.3 In the highly anticipated 4Q18, we expect revenue of W38.2bn (+11.3% YoY) and P/E (18F, x) 46.3 operating profit of W10.7bn (+133.5% YoY). We believe that quarterly operating profit Market P/E (18F, x) 8.4 will break the W10bn mark for the first time in 4Q18. We look for strength across KOSDAQ 670.82 album/digital content, concerts, and global platforms, driven by the active presence of the company’s full lineup. Specifically, we see: domestic album sales of 1.2mn ; DAY6’s Market Cap (Wbn) 1,075 world tour (15 performances); TWICE’s Japanese shows (four performances); and Shares Outstanding (mn) 35 GOT7’s Japanese hall tour (nine performances) . Meanwhile, the company is likely to Free Float (%) 76.3 book all of the remainder of TWICE’s Japanese arena tour and merchandise in 4Q18. Foreign Ownership (%) 9.6 Growth story to continue in 2019 Beta (12M) 1.13 Like its rivals, JYP Entertainment has artists that are expanding their global fan bases. 52-Week Low 10,450 Demand for GOT7 concerts is rapidly growing in the US and Latin America. The group 52-Week High 39,150 has 21 performances planned in 2019, more than double this year’s number . TWICE also looks likely to go on a North American tour in 2019. Meanwhile, ne w artist debuts (%) 1M 6M 12M remain on track. The company is set to debut a new girl group (Korea) in 1Q19 and two Absolute -13.9 54.9 188.8 new idol groups (one in China and one in Japan) by year-end. Relative -6.1 99.9 210.4 Maintain Buy and TP of W46,500 380 JYP Entertainment KOSDAQ 330 Global platform revenue is growing strongly across the industry. Entertainment firms 280 have transformed from concert organizers into global content producers (digital music/short videos). We believe the power of new platforms will continue to grow over 230 the long term, driven by changes in media consumption patterns. As beneficiaries of 180 this secular trend, we think entertainment stocks deserve a re-rating. Growing content 130 revenue will lead to not just better margins at JYP Entertainment and other 80 11.17 3.18 7.18 11.18 entertainment stocks, but also reduced earnings volatility. Our 2020 gross profit margin estimate for JYP Entertainment is 50% (versus 38% in 2017). Mirae Asset Daewoo Co., Ltd. [ Media ] FY (Dec.) 12/15 12/16 12/17 12/18F 12/19F 12/20F Revenue (Wbn) 51 74 102 127 142 183 Jeong -yeob Park +822 -3774 -1652 OP (Wbn) 4 14 19 30 40 57 [email protected] OP margin (%) 7.8 18.9 18.6 23.6 28.2 31.1 NP (Wbn) 3 8 16 23 30 43 EPS (W) 94 246 471 671 864 1,235 ROE (%) 5.6 13.4 21.4 23.0 22.5 25.3 P/E (x) 48.9 20.0 29.2 46.3 36.0 25.1 P/B (x) 2.2 2.1 4.8 8.1 6.6 5.3 Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 0.0 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 November 13, 2018 JYP Entertainment Table 1. Quarterly and annual earnings (Wbn, %, ‘000) 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18F 2017 2018F 2019F Revenue 22 29 17 34 23 32 34 38 102 127 142 Album/digital content 9 8 5 13 9 11 12 12 34 44 48 Management 10 13 8 10 9 14 10 13 42 46 53 Concert 2 5 1 3 1 7 4 5 10 18 23 Advertising 4 4 4 4 5 5 4 5 17 18 19 Appearance fees 4 5 3 3 3 3 2 3 15 11 11 Other 3 8 4 12 4 7 11 13 27 35 41 Operating profit 3.8 6.9 1.1 4.6 1.4 9.1 8.5 10.7 16 30 40 OP margin (%) 17.4 24.3 6.3 13.3 5.9 28.7 25.9 28.0 16.1 23.4 27.8 Pretax profit 3.4 9.8 1.3 6.6 2.4 9.7 8.5 10.3 21 31 40 Net profit 2.9 6.8 1.0 5.7 1.9 7.3 6.7 7.8 16 24 31 Net margin (%) 13.2 23.9 5.5 16.6 8.1 23.2 20.7 20.5 16.0 18.7 21.4 Net profit attributable to controlling interests 2.9 6.8 0.9 5.6 1.8 7.3 6.5 7.7 16.2 23.3 29.9 YoY Revenue 99.6 59.0 -8.1 33.5 5.0 10.6 93.9 11.3 38.8 23.9 12.4 Album/digital content 167.2 97.8 -7.5 76.4 9.5 41.2 138.3 -7.7 71.7 29.4 7.9 Management 72.1 39.7 -14.2 -10.0 -9.6 6.4 13.3 38.6 15.4 11.5 15.4 Concert 332.9 150.8 -79.1 -14.0 -48.8 52.2 582.2 104.0 21.3 76.1 31.7 Advertising 16.5 -5.3 8.0 -0.8 4.9 17.6 -12.4 24.7 4.4 8.2 6.0 Appearance fees 127.8 33.2 16.8 -17.5 -4.7 -46.0 -50.3 -0.7 26.4 -28.3 4.5 Other 69.0 67.5 7.7 54.0 38.2 -12.0 177.1 9.6 49.7 31.4 18.4 Operating profit 459.4 81.5 -69.1 -20.0 -64.1 30.9 664.0 133.5 18.9 80.1 33.6 Net profit 202.1 135.8 -70.6 303.4 -36.0 7.6 603.4 37.3 92.0 45.1 28.5 Net profit attributable to controlling interests 205.1 133.2 -70.6 318.4 -37.2 7.5 592.2 38.1 93.0 43.9 28.4 Key assumptions Domestic album sales volume ( ‘000) 644 380 58 918 454 565 769 369 918 369 456 Ticket sales volume in Japan ( ‘000) 8 76 71 95 73 108 83 94 250 357 470 Notes: All figures are based on consolidated K-IFRS Source: Mirae Asset Daewoo Research estimates Table 2. Earning forecast revisions (Wbn, %, %p) Previous Revised Change 18F 19F 18F 19F 18F 19F Revenue 122 138 127 142 4.1 2.9 Operating profit 29 39 30 40 3.0 1.0 Net profit 23 30 23 30 3.2 0.3 OP margin 23.6 28.3 23.4 27.8 -0.2 -0.5 Net margin 18.8 21.8 18.7 21.4 0.0 -0.4 Notes: All figures are based on consolidated K-IFRS; net profit is attributable to controlling interests Source: Mirae Asset Daewoo Research estimates Mirae Asset Daewoo Research 2 November 13, 2018 JYP Entertainment Figure 1. JYP’s YouTube net revenue outlook: Rapid growth driven by a simultaneous increase in ad rates and number of views (Wbn) 9 YouTube (Google) net revenue forecast 6.97885319 6 4.994762688 3.817044128 3 2 0 2017 2018F 2019F 2020F Source: Mirae Asset Daewoo Research Figure 2. JYP’s gross margin is driven by growing revenue contribution of the ‘other’ segment (under which sales to new platforms is recognized) and growth of core businesses (%) 50 Others GPM 43 36 29 22 15 2013 2014 2015 2016 2017 2018F 2019F 2020F Source: Mirae Asset Daewoo Research Figure 3. Concert attendance levels in Japan by lineup (mn persons) 1.0 JYP Nation Stray Kids DAY6 TWICE GOT7 2PM 0.8 0.6 0.4 0.2 0.0 2012 2013 2014 2015 2016 2017 2018F 2019F 2020F Source: Mirae Asset Daewoo Research Mirae Asset Daewoo Research 3 November 13, 2018 JYP Entertainment JYP Entertainment (035900 KQ/Buy/TP: W46,500) Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/17 12/18F 12/19F 12/20F (Wbn) 12/17 12/18F 12/19F 12/20F Revenue 102 127 142 183 Current Assets 58 87 122 170 Cost of Sales 63 69 74 92 Cash and Cash Equivalents 25 50 81 125 Gross Profit 39 58 68 91 AR & Other Receivables 11 12 14 15 SG&A Expenses 20 28 29 35 Inventories 2 2 2 2 Operating Profit (Adj) 19 30 40 57 Other Current Assets 20 23 25 28 Operating Profit 19 30 40 57 Non-Current Assets 66 76 76 75 Non-Operating Profit 2 1 0 0 Investments in Associates 0 0 0 0 Net Financial Income 0 0 1 1 Property, Plant and Equipment 25 33 32 32 Net Gain from Inv in Associates -1 0 0 0 Intangible Assets 29 29 29 29 Pretax Profit 21 31 40 57 Total Assets 124 162 198 245 Income Tax 5 7 10 14 Current Liabilities 35 39 44 47 Profit from Continuing Operations 16 24 31 44 AP & Other Payables 12 13 14 16 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 0 0 0 0 Net Profit 16 24 31 44 Other Current Liabilities 23 26 30 31 Controlling Interests 16 23 30 43 Non-Current Liabilities 4 4 5 5 Non-Controlling Interests 0 0 1 1 Long-Term Financial Liabilities 0 0 0 0 Total Comprehensive Profit 16 25 31 44 Other Non-Current Liabilities 4 4 5 5 Controlling Interests 16 25 30 43 Total Liabilities 39 43 48 52 Non-Controlling Interests 0 0 0 0 Controlling Interests 85 118 148 190 EBITDA 22 30 40 57 Capital Stock 17 17 17 17 FCF (Free Cash Flow) 2 24 34 46 Capital Surplus 55 56 56 56 EBITDA Margin (%) 21.6 23.6 28.2 31.1 Retained Earnings 27 50 80 123 Operating Profit Margin (%) 18.6 23.6 28.2 31.1 Non-Controlling Interests 1 1 2 3 Net Profit Margin (%) 15.7 18.1 21.1 23.5 Stockholders' Equity 86 119 150 193 Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/17 12/18F 12/19F 12/20F 12/17 12/18F 12/19F