Subsidiaries Ambushed by COVID-19
The author is an analyst of NH Investment & Securities. She can be reached at hzl.lee@nhqv.com. -- Ed.
YG Entertainment registered a 1Q20 earnings shock, weighed upon by the impact of Covid-19 on subsidiaries. In the case of digital tracks, however, stable overseas sales were maintained and global brand strength was proven once again. Upon improvement in the external business environment, upside expectations related to the US (BLACKPINK) and China (Big Bang) should return.
1Q20 review: Subsidiaries ambushed by Covid-19
YG Ent registered a 1Q20 earnings shock, with consolidated sales of W52.8bn (-18% y-y) and an operating loss of W2.1bn (RR y-y). At the main business, OP fell to W1.9bn (-33% y-y), affected by concert cancellations and new album release delays. Meanwhile, subsidiaries were hit hard by Covid-19, with YG PLUS’s Green Works (golf reservation), Code Cosme (cosmetics), YG K Plus (model management), and YGX’s academy division suffering losses due to the contraction in outdoor activities—resulting in overall loss expansion. While the situation is likely to be similar in 2Q20, we expect q-q improvement on the back of stable overseas sales and a resumption in activities by major artists.
Stable global demand confirmed by digital sales
On the Gaon Digital Chart, the number of YG Ent artist songs streaming in Korea in 1Q20 reached just 20% of 1Q19’s figure, affected by: 1) high-base effect from box-office tracks such as SOLO and Anakne; and 2) domestic boycotts of iKON. Nevertheless, digital track sales totaled W9.9bn (-14% y-y) in 1Q20, thanks to stable overseas sales (70% portion).
In particular, it is encouraging that the percentage of sales to the US, excluding YouTube, has expanded from the single-digit level to 15% as of late. It appears that YG Ent is truly becoming a global operator, including in the Western world.
To shine most brilliantly if Covid-19 situation and Korean content restrictions improve
In 1Q20, while the firm’s digital track sales to the US grew about 10x (to approximately W1bn) versus the 1Q19 level, the majority of its US music demand continues to relate to BLACKPINK. Believing that BLACKPINK possesses potential for a steep rise in awareness in the US, we expect that significant album and concert sales will be generated in the US once tours resume following an easing in the Covid-19 crisis.
In China, Big Bang member G-Dragon has emerged as the first Korean advertising model since the arrival of Korean content restrictions, a factor appearing to prove the boy group’s strong recognition. We expect YG Ent to benefit greatly from a further easing of Korean content restrictions down the road.