Company Note February 23, 2017 YG Entertainment (122870) 12M rating Value Stock Data Hold (Downgrade) Growth Turn around Issue KOSPI (Feb 22, pt) 2,107 Stock price (Feb 22, KRW) 27,850 Market cap (USD mn) 403 Shares outstanding (mn) 17 52-Week high/low (KRW) 46,700/25,400 6M avg. daily turnover (USD mn) 2.2 Free float / Foreign ownership (%) 59.0/15.9 Major shareholders (%) Hyeon-Seok Ryang and 6 others 23.3 Shanghai Fengying Business Consultant Partnership Ltd. 8.9 Performance 1M 6M 12M Absolute (%) 1.8 (16.1) (28.0) Relative to KOSPI (%p) (0.2) (19.3) (38.0) 12MF PER trend 35.0 30.0 25.0 20.0 15.0 10.0 5.0 (X) 12MF PER (LHS) price (RHS) (KRW) 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 Mounting China risk; Limited upside 4Q16 results far below consensus YG Entertainment (YG) reported 4Q16 sales of W70.3bn (+26.1% YoY) and OP of W3.5bn (-13.7%). The OPM fell 2.3%p YoY to 5%. Both sales and OP missed the consensus estimates by 6.6% and 47.5%, respectively. Revenue from the concerts in Japan by Big Bang, ikon and WINNER held in 3Q16 was booked in 4Q16. On a separate basis, sales were largely flat YoY. But OP rose 15.9% YoY as the OPM gained 1.7%p thanks to a larger sales weighting of high-margin royalties earned in Japan. But YG Plus, a major subsidiary, made an W3.3bn operating loss that was much larger than forecast, and this caused poor consolidated results. The lossmaking at YG Plus was due to a valuation loss on cosmetics inventory. China is the biggest worry With China s retaliatory actions against Korea for deciding to deploy the US Terminal High Altitude Area Defense (THAAD) anti-missile system emerging as a prolonged issue, concerns are mounting for YG. In particular, there are growing risks related to YG Plus, hoped to be a key growth driver going forward. In 2016, YG Plus saw sales of W70.4bn, up 140.8% YoY, but made a W6.8bn operating loss. The reason is YG Plus core cosmetics division continues to deliver poor earnings. YG Plus penetration into China, a crucial target market, is proceeding more slowly than hoped and this would continue to weigh on consolidated earnings in 2017. YG artists activities are losing momentum as well. As entertainment companies generate revenue from direct activities by artists, they are more affected by regulatory measures and political conflicts than other sectors. It is estimated that 4Q16 separate OP increased on greater royalties from activities in Japan, which is a lucrative source of revenue, but the OP gain fell short of expectations due to limited activities in China. 0.0 Mar-14 Mar-15 Mar-16 Source: WISEfn consensus 0 Downgrade to Hold We downgrade our rating to Hold considering momentum has been eroding for YG Plus and artists activities amid Korea s political conflicts with China. The artist lineup has weakened as well due to Big Bang members doing their military service. With only limited sub-group activities, 2017F sales and OP should decrease 0.1% YoY and 1.4% YoY, respectively. Daesung has a solo tour scheduled in Japan s dome venues in April (four shows) while Big Bang without member T.O.P. will perform five dome concerts in May and June. Of note, boy band ikon has two dome concerts in May-June, only after a year and nine months since their debut. Sangung Han 822-3276-4563 sangung@truefriend.com Yr to Sales OP NP EPS % chg EBITDA PE EV/EBITDA PB ROE DY Dec (W bn) (W bn) (W bn) (KRW) (YoY) (W bn) (x) (x) (x) (%) (%) 2014A 156 22 19 1,328 (11.1) 26 33.3 22.1 4.1 13.4 0.6 2015A 193 22 28 1,855 39.7 26 24.0 23.5 3.6 14.7 0.8 2016F 322 32 19 1,167 (37.1) 39 24.3 9.5 1.8 7.6 1.2 2017F 322 31 27 1,596 36.8 39 17.4 7.6 1.6 8.9 1.3 2018F 310 26 23 1,380 (13.5) 33 20.2 8.3 1.5 7.2 1.3 Note: Net profit and EPS are based on figures attributed to controlling interest Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS AT THE END OF THIS REPORT.
This is the shortest period for a foreign artist or band to hold dome concerts in Japan following their debut. But after 2017, earnings erosion from the void of Big Bang s full activities appears inevitable. The recent correction pulled YG s 2017F PE to as low as 17.1x. The valuation premium the company enjoyed in the past (more than 20x PE) was bolstered by expanding areas of activities, stronger artist lineup and expectations for YG Plus new businesses. Share price upside seems limited until concerns fade. Table 1. Earnings outlook 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16P 2015 2016P 2017F Sales 44.4 45.3 47.7 55.8 73.0 77.3 101.3 70.3 193.1 321.8 321.6 Albums/DVD 2.0 1.6 1.5 4.0 3.1 1.0 2.3 3.7 9.1 10.1 9.2 Digital music 5.4 6.2 6.4 9.1 7.8 10.6 8.4 8.3 27.1 35.0 32.1 Merchandise 1.3 3.4 3.8 4.9 7.6 10.1 13.5 14.2 13.4 45.4 49.1 Concerts 1.9 10.1 13.9 16.2 17.1 8.5 29.5 7.0 42.1 62.0 60.9 Advertising 5.2 6.0 7.3 5.6 5.1 6.3 9.6 8.9 24.0 29.9 28.9 Royalties 19.9 5.6 3.3 4.2 24.3 22.1 15.1 14.3 33.0 75.7 73.7 Commissions 3.6 8.6 5.1 6.8 4.3 8.0 7.1 8.9 24.1 28.3 37.5 Appearances 5.1 3.8 6.4 5.0 3.7 10.7 15.8 5.2 20.3 35.4 30.1 OP 7.2 5.1 5.5 4.1 9.5 6.8 12.1 3.5 21.8 31.9 31.5 NP 5.8 11.6 4.6 2.0 6.4 6.6 2.3 (1.2) 24.0 14.1 27.1 (% YoY) Sales 1.2 35.4 23.5 38.0 64.3 70.7 112.4 26.1 23.5 66.7 (0.1) OP (13.5) 4.2 19.9 (2.2) 32.6 33.1 121.3 (13.7) (0.4) 46.3 (1.4) NP (0.4) 186.9 (26.6) (6.2) 11.2 (43.3) (50.9) NM 31.2 (41.2) 91.9 Profitability (%) OPM 16.1 11.3 11.5 7.3 13.0 8.8 12.0 5.0 11.3 9.9 9.8 NPM 13.0 25.6 9.7 3.5 8.8 8.5 2.3 (1.7) 12.4 4.4 8.4 Source: Company data, Korea Investment & Securities (W bn) Table 2. Revised earnings (W bn, %) 2017F 2018F Previous Revised Diff. Previous Revised Diff. Sales 329.0 321.6 (2.3) 350.4 310.1 (11.5) OP 37.3 31.5 (15.5) 40.9 26.3 (35.5) NP 29.1 27.1 (7.2) 28.7 22.7 (21.1) OPM 11.3 9.8 (1.5) 12.4 8.2 (4.2) NPM 8.9 8.4 (0.4) 8.7 7.0 (1.7) Source: Korea Investment & Securities Figure 1. 12MF PE band 90,000 (KRW) 80,000 70,000 60,000 50,000 40,000 30,000 20,000 35x 30x 25x 20x 15x 10,000 0 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Source: Korea Investment & Securities 2
Balance sheet FY-ending Dec. (W bn) 2014A 2015A 2016F 2017F 2018F Current assets 252 246 303 303 332 Cash & cash equivalent 142 34 32 39 47 Accounts & other receivables 15 24 32 32 37 Inventory 11 15 16 16 19 Non-current assets 88 130 183 203 196 Investment assets 37 43 72 90 87 Tangible assets 28 47 50 53 57 Intangible assets 21 36 55 55 47 Total assets 340 375 486 506 528 Current liabilities 32 42 72 71 75 Accounts & other payables 21 28 48 58 62 ST debt & bond 0 0 0 0 0 Current portion of LT debt 0 0 0 0 0 Non-current liabilities 62 64 64 64 64 Debentures 0 0 0 0 0 LT debt & financial liabilities 60 63 63 63 63 Total liabilities 94 106 136 135 139 Controlling interest 177 204 287 308 326 Capital stock 8 8 8 8 8 Capital surplus 96 97 97 97 97 Other Reserves 1 2 72 72 72 Retained earnings 73 97 110 131 148 Minority interest 69 66 63 63 63 Shareholders' equity 246 269 349 371 389 Income statement FY-ending Dec. (W bn) 2014A 2015A 2016F 2017F 2018F Sales 156 193 322 322 310 COGS 103 127 227 211 209 Gross profit 54 66 95 111 101 SG&A expense 32 44 63 79 74 Operating profit 22 22 32 31 26 Financial income 11 18 9 8 8 Interest income 2 5 6 7 7 Financial expense 2 4 4 4 4 Interest expense 0 1 1 1 1 Other non-operating profit (3) (2) 0 0 0 Gains (Losses) in associates, subsidiaries and JV 0 0 0 0 0 Earnings before tax 27 33 37 35 31 Income taxes 9 9 21 9 8 Net profit 18 24 16 27 23 Net profit of controlling interest 19 28 19 27 23 Other comprehensive profit (1) 1 1 1 1 Total comprehensive profit 17 25 17 27 24 Total comprehensive profit of controlling interest 18 28 20 27 24 EBITDA 26 26 39 39 33 Cash flow FY-ending Dec. (W bn) 2014A 2015A 2016F 2017F 2018F C/F from operating 34 6 27 33 27 Net profit 18 24 16 27 23 Depreciation 2 2 2 3 3 Amortization 2 2 5 5 4 Net incr. in W/C 13 (19) 7 (1) (2) Others (1) (3) (3) (1) (1) C/F from investing (21) (115) (96) (21) (14) CAPEX (17) (22) (6) (6) (7) Decr. in fixed assets 0 0 0 0 0 Incr. in investment (43) (73) (28) (17) 4 Net incr. in intangible assets (3) (15) (24) (5) 4 Others 42 (5) (38) 7 (15) C/F from financing 105 1 66 (6) (6) Incr. in equity 51 6 0 0 0 Incr. in debts 60 1 0 0 0 Dividends (3) (4) (6) (6) (6) Others (3) (2) 72 0 0 C/F from others 1 (0) 0 0 0 Increase in cash 120 (108) (2) 6 8 Key financial data FY-ending Dec. 2014A 2015A 2016F 2017F 2018F per share data (KRW) EPS 1,328 1,855 1,167 1,596 1,380 BPS 10,830 12,440 16,048 17,258 18,266 DPS 250 350 350 350 350 Growth (%) Sales growth 34.4 23.5 66.7 (0.1) (3.6) OP growth (1.2) (0.4) 46.3 (1.4) (16.4) NP growth 24.9 44.9 (33.4) 43.1 (13.6) EPS growth (11.1) 39.7 (37.1) 36.8 (13.5) EBITDA growth 3.0 2.4 47.7 (0.5) (14.5) Profitability (%) OP margin 14.0 11.3 9.9 9.8 8.5 NP margin 12.3 14.5 5.8 8.3 7.4 EBITDA margin 16.5 13.7 12.1 12.1 10.7 ROA 7.7 6.7 3.7 5.4 4.4 ROE 13.4 14.7 7.6 8.9 7.2 Dividend yield 0.6 0.8 1.2 1.3 1.3 Dividend payout ratio 21.3 20.6 30.9 21.6 25.0 Stability Net debt (W bn) (159) (126) (162) (225) (248) Int.-bearing debt/equity (%) 24.6 23.4 18.0 0.0 0.0 Valuation (X) PE 33.3 24.0 24.3 17.4 20.2 PB 4.1 3.6 1.8 1.6 1.5 EV/EBITDA 22.1 23.5 9.5 7.6 8.3 Note: Based on K-IFRS (consolidated) 3
Changes to recommendation and price target Company (Code) Date Recommendation Price target YG Entertainment (122870) 04-07-15 BUY W60,000 07-04-16 BUY W54,000 02-23-17 Hold - 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Feb-15 Jun-15 Oct-15 Feb-16 Jun-16 Oct-16 Feb-17 4
Guide to Korea Investment & Securities Co., Ltd. stock ratings based on 12-month forward share price performance relative to the market index BUY: Expected to outperform the market index by 15%p or more Hold: Expected to underperform or outperform the market index by less than 15%p Underweight: Expected to underperform the market index by 15%p or more Korea Investment & Securities does not offer target prices for stocks with Hold or Underweight ratings. Guide to Korea Investment & Securities Co., Ltd. stock rating allocation (as of Dec 31, 2016) BUY Hold Underweight (Sell) 77.6% 21.1% 1.3% Note: % of companies under coverage with this rating Guide to Korea Investment & Securities Co., Ltd. sector ratings for the next 12 months Overweight: Recommend increasing the sector s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market capitalization. Neutral: Recommend maintaining the sector s weighting in the portfolio in line with its respective weighting in the Kospi (Kosdaq) based on market capitalization. Underweight: Recommend reducing the sector s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market capitalization. Analyst Certification I/We, as the research analyst/analysts who prepared this report, do hereby certify that the views expressed in this research report accurately reflect my/our personal views about the subject securities and issuers discussed in this report. I/We do hereby also certify that no part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report. Important compliance notice As of the end of the month immediately preceding the date of publication of the research report or the public appearance (or the end of the second most recent month if the publication date is less than 10 calendar days after the end of the most recent month), Korea Investment & Securities Co., Ltd., or its affiliates does not own 1% or more of any class of common equity securities of YG Entertainment. There is no actual, material conflict of interest of the research analyst or Korea Investment & Securities Co., Ltd., or its affiliates known at the time of publication of the research report or at the time of the public appearance. Korea Investment & Securities Co., Ltd., or its affiliates has not managed or co-managed a public offering of securities for YG Entertainment in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates has not received compensation for investment banking services from YG Entertainment in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates does not expect to receive or intend to seek compensation for investment banking services from YG Entertainment in the next 3 months. Korea Investment & Securities Co., Ltd., or its affiliates was not making a market in YG Entertainment s securities at the time that the research report was published. Korea Investment & Securities Co., Ltd. does not own over 1% of shares of the companies mentioned in this report as of February 23, 2017. Korea Investment & Securities Co., Ltd. has not provided this report to various third parties. Neither the analyst/analysts who prepared this report nor their associates own any shares of the company/companies mentioned in this report as of February 23, 2017. Prepared by: Sangung Han 5
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