YG Entertainment, Ready to Soar Again?

Improvement in Performance through Streamlining Deficit Businesses

[Asia Economy Reporter Eunmo Koo] As the novel coronavirus infection (COVID-19) spreads and overall investment sentiment deteriorates, YG Entertainment (YG Enter) posted improved earnings and rose for two consecutive days. The company is preparing to focus on its core business such as music distribution by restructuring loss-making businesses, which is expected to accelerate profit improvement.

According to the Korea Exchange on the 27th, YG Enter's stock price closed at 31,750 won, up 3.76% (1,150 won) from the previous trading day. With two consecutive days of gains, the stock price, which had fallen to the 10,000 won range last year amid the 'Burning Sun Gate' scandal, has now risen to the 30,000 won level.

The improved earnings by restructuring loss-making businesses are interpreted as raising future expectations. According to the financial investment industry, YG Enter recorded consolidated sales of 58 billion won and operating profit of 7.1 billion won in the fourth quarter of last year. Although sales decreased by 30.3% compared to the same period last year, operating profit increased by 85.5%. The sale of the food service company YG Food and the suspension of operations of the headquarters' content production division reduced losses by about 10 billion won, positively impacting earnings.

As the company restructures loss-making businesses and focuses on its core business, profit improvement is also expected to gain momentum. From 2011 to 2015, when YG Enter concentrated on its core business, digital content and royalty revenues sharply increased, recording a gross profit margin of 34-39%. However, as the company began diversifying into food and beverage and cosmetics in 2016, the gross profit margin fell to 24.7% in 2018.

Hyoji Nam, a researcher at KTB Investment & Securities, predicted, "This year, the gross profit margin will improve significantly as loss-making businesses unrelated to the core business are restructured." Jeongyeop Park, a researcher at Mirae Asset Daewoo, also analyzed, "Since the company has gone through trial and error, future profits are likely to focus on recoverable investments to build core business sales sources."

In the first quarter of this year, due to the impact of COVID-19, activities of major artists have been delayed, resulting in poor earnings at the breakeven level. Initially, Sechs Kies and iKON were scheduled to make a comeback in the first quarter, followed by WINNER and BLACKPINK, but offline activities such as concerts became difficult due to COVID-19, making activity delays inevitable. Currently, the remaining first-quarter concerts of WINNER and AKMU have also been canceled.

However, from the second quarter, as major artists resume activities, both stock price and earnings are expected to rebound. Younghyun Jeon, a researcher at SK Securities, said, "Big Bang will resume activities in April, and the rookie group TREASURE will debut, providing definite growth drivers," adding, "Starting with BLACKPINK's comeback in the second quarter and the confirmation of TREASURE's specific album activity plans, strong earnings growth is expected in the second half of the year."