YG Entertainment (122870 KQ/Buy)Share issues to create near-term downside pressures

Share issues to create near-term downside pressures


1Q OP hits record high on royalties from Big Bang’s Japanese dome tour

For 1Q14, YG Entertainment posted record-high operating profit of W8.3bn (+31.5% YoY) on revenue of W43.9bn (+47.1% YoY).

1Q royalty income doubled YoY to W22bn, as the majority of revenue from Big Bang’s 2013 Japanese dome tour (600,000 attendees) was recognized in the quarter. 1Q concert revenue remained flat YoY at W5.08bn, which included revenue from Big Bang’s Seoul concerts held on the 24th to 26th of January (30,000 attendees) and 2NE1’s March 1st and 2nd Seoul concerts (12,000 attendees).

2014 highlights: New Psy album and artist debuts

In the wake of last month’s ferry disaster, YG Entertainment has postponed many events originally scheduled for May, including album releases. Still, the company is moving ahead with overseas events as planned, including 2NE1’s world tour (17 concerts in 13 cities across 9 countries), and the YG Family tour (two concerts at the Osaka Dome in April and two more at the Tokyo Dome in May).

In 2014, Psy is expected to come out with a new full-length album targeting a global audience. Big Bang is also set to release a new full-length album, possibly in 4Q. After completing its run in Japan, the YG Family tour will head to Korea and China (likely at a 50,000-capacity stadium).

Big Bang, the company’s biggest act in terms of revenue contribution, is expected to follow up its new album release with a world tour at the end of the year (lasting into 1H15). The duo Akdong Musician released their debut album in April, which has been doing better than expected. WINNER, which has already demonstrated its popularity in Japan at YG Family concerts, is also likely to release its first album soon. In addition, YG Entertainment is likely to unveil a new girl group (the first since 2NE1’s 2009 debut), and reveal its plans for the winners of the reality program WIN: Who is Next by the end of the year.

Maintain Buy, but Cut TP to W58,000 on share issues

We slashed YG Entertainment’s 2014F and 215F EPS by 31.4% and 35.1%, respectively, reflecting: 1) the postponement of several events and 2) the increase in total shares outstanding following the company’s rights and bonus issues. The company plans to spend the proceeds from the rights issue on purchasing property in the US to expand its presence there, and also on acquiring new artists through model agencies and talent academies. Some of the proceeds could also be used to expand the firm’s headquarters to secure more training space as its artist lineup expands.

We cut our target price on YG Entertainment to W58,000 from W70,000, applying the average multiple (28x) of global media and entertainment peers to our revised 2014F EPS following the shares issue.




EarningTable_Summary
FY (Dec.) 12/11 12/12 12/13 12/14F 12/15F 12/16F
Revenue (Wbn) 78 107 116 150 179 201
OP (Wbn) 18 21 22 33 38 43
OP margin (%) 23.1 19.6 19.0 22.0 21.2 21.4
NP (Wbn) 13 19 15 31 32 36
EPS (W) 1,209 1,381 1,116 2,095 2,116 2,381
ROE (%) 16.9 21.6 14.8 24.7 21.0 19.8
P/E (x) 22.8 33.3 34.9 23.0 22.8 20.2
P/B (x) 4.8 6.5 4.9 5.2 4.4 3.7
Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests
Source: Company data, KDB Daewoo Securities Research estimates


**** Please see the attached files for details.

Author Chang-kwean Kim

Date 05-19-2014

Stock Code 122870

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