BTS label Big Hit Entertainment on bumpy road to public offering
Market watchers say Big Hit is overvalued, short of revenue sources
Published : May 5, 2020 - 17:21
Updated : May 6, 2020 - 16:00
South Korean music label Big Hit Entertainment’s crown jewel BTS (Big Hit Entertainment)

Big Hit Entertainment, one of the largest music labels in South Korea and home to K-pop darlings BTS, has been preparing to go public on the nation’s main Kospi bourse this year on the back of the boy band’s worldwide popularity.

The K-pop band’s latest album, “Map of the Soul: 7,” sold 422,000 album equivalent units in the first week since its release in February, topping the Billboard 200 chart for the fourth time. The K-pop kings recently performed an online concert called “Bang Bang Con,” attracting more than 50 million BTS fans, referred to as its “Army.” It was organized after their offline concerts in Korea and the North American region had been called off early this year due to the ongoing novel coronavirus crisis.

Reflecting the boy band’s astonishing achievements, the company’s profits have grown in recent years. Its sales grew 95 percent on-year to 587.9 billion won ($482.6 million) in 2019, while its operating income increased 17 percent to 97.5 billion won. The label is estimated, by some brokerage firms, to exceed 4 trillion won in value. Its underwriters for the IPO, including NH Investment and Securities, Korea Investment & Securities, JP Morgan and Mirae Asset Daewoo, valued the firm at some 6 trillion won.

Despite Big Hit’s head-turning growth, forecasts for its planned IPO are not all rosy, according to market watchers.

“The IPO will surely draw lots of attention from investors around the world, as well as those BTS fans,” said a source in the local brokerage market, adding “However, there are still a number of challenges that the label has to overcome to hit a home run in the IPO market.”

Some market critics claimed the company has been overvalued, considering market caps of other local entertainment giants. The respective market cap of JYP and SM Entertainment stands at some 736.5 billion won and 647.2 billion won. The 6 trillion-won valuation rivals the nation’s conglomerates, including telecom giants KT and LG Uplus and the Industrial Bank of Korea.

In addition, the K-pop septet is almost the only revenue source of the entertainment company. Few singers under the label have made a major hit yet, while other businesses, including mobile games and online cartoons that utilize intellectual property rights linked to K-pop bands, have fallen far short of proving profitable.

Big Hit Entertainment CEO Bang Si-hyuk speaks during a corporate briefing in Seoul on Feb. 4. (Big Hit Entertainment)

“When local label YG Entertainment went public some years ago, its heavy reliance on four-member boy band Big Bang served as some kind of a roadblock when making its debut on the nation’s secondary Kosdaq market,” said an analyst from a local brokerage firm, adding, “Big Hit may have to diversify its revenue sources to make a successful debut on the stock market and appeal to investors.”

Some members of the Korean septet will soon have to serve their mandatory military duty in the coming years, and this poses risks against Big Hit’s IPO scheme. Male citizens aged between 18 and 28 are required to serve in South Korea, which remains technically still at war with the North. Born between 1992 and 1997, all the BTS members currently meet the age requirement. Vocalist Jin, who turns 28 this year, is expected to enlist in the military by the end of the year.

“There is a growing doubt over sustainability of Big Hit’s business models as its cash cow and crown jewel BTS still has the military issue unsolved,” an industry source working in the investment industry said.

Making matters worse, the ongoing coronavirus pandemic has forced the entertainment firm to cancel or temporarily halt scheduled offline music events here and abroad this year. If lockdowns and social distancing campaigns continue across the globe, it is unclear when those large-scale concerts will be able to take place. The cancellations of those concerts are largely expected to undermine Big Hit’s profits.

Despite the risks, some analysts said that the impact of BTS on the global entertainment market is not negligible at all, and Big Hit will certainly benefit from it as it prepares for the IPO.

“BTS wields larger influence on the global entertainment segment than emerging content makers like Studio Dragon,” said Kim Hyun-yong, an analyst from eBEST Investment & Securities, forecasting that the estimated market cap of the BTS label would reach 3 to 4.5 trillion won.

The Seoul-based label was founded in 2005 by songwriter and producer Bang Si-hyuk. He is the largest shareholder with 43 percent stake, while his cousin, gaming firm Netmarble Chairman Bang Joon-hyuk, is the second-largest shareholder with 25.22 percent stake. BTS renewed a seven-year contract with Big Hit in 2018.

By Kim Young-won (