Squashed investors wonder if Big Hit has more than one star

Korean boy band fans share stories with fellow travelers on K-pop forums.

A pressing new topic popped up last week: How to Get Your Money Back If You Regret Your Investment in South Korea’s Most Famous Music Agency, which was featured earlier this month. “How do I get a refund for the shares I bought?” Asks a desperate investor. “I still have the receipt.”

Questions like these have been shared on message boards by retail investors who have amassed the Big Hit Entertainment list. The IPO of the agency behind the global pop phenomenon BTS was one of the most anticipated of the year. It wasn’t long before the disappointment set in.

By the end of the first day of trading, stocks had peaked and were on their way down. Institutional investors and overseas funds sold stocks for almost half of the total outstanding amount in the first two days. After a week, the fourth largest shareholder in Big Hit, a private equity firm, had sold half of its stake, or 4.5 percent, of its outstanding shares. Private investors were surprised by many.

The $ 50 billion retail lottery

Prior to going public, there were signs that market sentiment was proving to be inconsistent with economic realities. An army of BTS fans, along with millions of retail investors, have deposited more than $ 100,000 each to win an allotment of just two shares in a lottery. The central bank was so alarmed by the resulting huge flows of money into brokerage – more than $ 50 billion in total – it was keeping a close eye on it.

But then it also seemed that die-hard institutional investors had been turned into believers. BlackRock and GIC were among 1,400 institutional funds that flocked to get shares in the IPO.

At the start of trading, the stock nearly doubled – from an IPO price of 135,000 won ($ 115) to 270,000 won ($ 236). From there, they rose another 30 percent as the private investors who missed the lottery sparked a trading frenzy. But at 9.15 a.m. a downward march had begun. Big Hit stocks are currently trading at around 156,000 won.

A one hit addiction

Aside from Big Hit’s IPO, K-pop is a growing economic force. The combination of catchy melodies, synchronized dance routines, perfect skin and considerable social media know-how has made a lot of money.

South Korean exports of automobiles and petrochemicals have declined this year, but a K-pop song – ‘Dynamite’ by BTS, released this August – resulted in exports of album sales and other merchandise worth $ 1.5 billion . USD.

The pandemic has also opened up new opportunities. More than 7 million fans attended two of the band’s online concerts this year after the world tours were canceled. The sales of goods associated with these performances were more than double what would be expected from a physical concert.

But one of Big Hit’s downsides is that its future rests on the shoulders of only one band – the seven members of BTS, who made up more than 97 percent of the agency’s revenue last year.

Two of the seven should disappear in the next few years for up to two years of military service. If this has happened to other bands, they have trouble recovering.

There is talk now of allowing K-pop stars to postpone their time in the military, but it would have to happen soon to prevent a partial breakup of BTS.

New music, older business model

Perhaps this explains why Big Hit has been keen to advertise as a “platform” company lately, and specifically, promoting growing sales on its online app, where fans watch BTS videos, pay membership fees and shop for goods.

However, the business model is anything but high-tech. Almost all of the money is made the traditional way by a music agency. Concerts made up around a third of total sales last year. Most of the rest comes from sales of fan merchandise, licenses, and albums.

It is also struggling to build a pipeline of new pop groups. The entry barrier is not high for competitors. There are more than 2,000 entertainment agencies in South Korea with over 1 million signed pop trainees. Just over a decade ago, Big Hit struggled after a string of failed bands and was on the verge of bankruptcy. His fate changed when RM, the rapper in BTS, approached him with a self-made demo tape.

“To be fair, the formula for starting a hit band can’t be bottled. Nobody knows if a band will make it by then, ”said Lee, a Seoul-based competing record producer with 24 years of industry experience. “But some agencies have a better average than others.”

Local rival JYP Entertainment is one of them that has consistently formed hit groups with at least two years of overlap between groups.

Big Hit, on the other hand, has not yet managed to find the next BTS – despite 105 signed trainees. Instead, it has tended to attract musical talent by acquiring smaller local agencies.

The agency’s problems are exacerbated by local laws that limit the K-pop group’s contracts to a maximum of seven years. Once popular, many members act like Premier League footballers themselves.

Even if members stay signed with the same agency, the revenue-sharing agreement tends to change in favor of the band with the new contract, which significantly impacts the agency’s profit margins. On top of that, most K-pop groups have tended to peak in popularity after five years and then wane. BTS has been around for seven years, two years after his second deal with Big Hit.

Can the mega-rating be justified?

Kihoon Lee, an analyst at Hana Financial Investment, believes Big Hit has a strong history to sell nonetheless. “Investors are too pessimistic about lost concert revenues. Online concerts – there are no additional costs for broadcasting them – are becoming a completely new source of income. ”

He added that the market shouldn’t overlook the potential of the platform business either. “It’s emerging as a place to sell content, tickets and merchandise, and not just for BTS. This potential is enormous. ”

The industry can look back on impressive market successes. Investors who bought shares of two of Big Hit’s biggest competitors, SM and JYP Entertainment, have seen spectacular fortunes. In their prime, investors have earned more than 23x the return on their original investment.

But even before a single big hit share changed hands, its IPO price was already almost 60 times the valuation of the future profit. SM traded 13 times the same level in its first year of listing. JYP only four times in the early years.

„Blockbuster [Korean] The listings this year followed a pattern: The shares reached the limit of 160 percent on the first day of trading, ”said Hoonsik Min, Research Analyst at Credit Suisse. “Some investors assume this is the new norm. The problem, however, is that Big Hit starts at a much higher level than its predecessors. These levels are not sustainable. ”

Big Hit’s high rating also goes against its declining profitability. Competitors have managed to keep operating margins consistently high – more than 40 percent for JYP in the first quarter. Big Hit’s margins have dropped to less than half as the company has invested heavily in its platform business. The question is whether this platform still has the same potential without the BTS.

“When I look back on the past two decades of K-pop bands, every time a band peaked it felt like that fame would last forever, sometimes even to me,” said record producer Mr. Lee. “For younger fans, BTS is like their first love, so it can be dazzling. Fame is a powerful drug, not just for the artists but also for the fans. There’s always a comedown. ”