Entertainment
The author is an analyst for Shinhan Securities. She can be reached at inhae.ji@shinhan.com -- Ed.
Earnings hit a new high in 2Q23
JYP Entertainment set new record-high earnings with sales of KRW151.7bn (+124% YoY) and operating profit of KRW45.7bn (+88% YoY) in 2Q23. Both sales and operating profit fell slightly short of the market consensus as well as our projections.
As anticipated, the company booked solid album sales of roughly 6.4mn copies (Stray Kids, TWICE, NMIXX, etc.) and concert sales at home and abroad. It also booked around KRW5.5bn in deferred sales from Japanese girl group NiziU’s concerts held in 4Q22. Sales of KRW14.7bn received from the US label Republic Records (recognition in 1Q and 3Q) were added to album sales. Meanwhile, sales from TWICE’s Japanese concerts held in 2Q23 are set to be recognized in the next quarter.
Reasons behind the gap with earnings projections
Breaking down sales results, concerts generated KRW14.5bn, endorsements KRW7.1bn, appearance fees KRW2.7bn, merchandise KRW21.7bn, and others KRW19.1bn, faring slightly better than our sales projections. However, a sharp gap was seen in high-margin album sales (actual sales of KRW74.1bn vs. our forecast of KRW81.6bn).
Album sales are estimated by multiplying the number of copies sold on Circle Chart by the unit price. Although prices vary by company, the average unit price is calculated by dividing total album sales by the number of copies sold. The unit price averages around KRW13,000, even after taking account of fluctuations in quarterly results caused by album sales received in lump sum from the US partner or platforms. The unit price in 2Q23 came below the average at KRW11,611, which falls further to the KRW9,300 range when excluding sales from Republic Records. As such, the album sales gap was caused by the difference between the actual unit price of KRW11,611 and our estimate of KRW12,750.
Furthermore, the company saw increases in COGS and SG&A, including content production costs and fees paid to celebrities, with the booking of bonus payments spread evenly across quarters and the focus placed on developing new artists as well as supporting existing artists. One-offs incurred from the A2K (America to Korea) project are assumed to be KRW2.4bn. With the girl group’s debut imminent, the company will be able to fully make up for these costs once related sales begin to flow in and drive operating leverage effect. Operating margin exceeded the 30% mark despite cost hikes.
Earnings fundamentals remain strong
We retain our BUY rating on JYP Entertainment in view of: 1) strong earnings fundamentals that held operating margin at 30% despite aggressive investments; 2) operating leverage from sales generated through IP investments; and 3) smooth progress seen in global projects in Korea, US, China, and Japan. The stock has been recently included in the MSCI Korea Index. Amid a short-term lull in earnings momentum, we expect buying opportunities to arise in case of share price correction.